Offset Accounts vs Redraw Facilities: Which Is Right for You?
- Both offset accounts and redraw facilities reduce the interest you pay on your home loan — but they work very differently.
- An offset account is a separate transaction account linked to your loan. Money in it reduces the balance on which interest is charged daily.
- A redraw facility lets you access extra repayments you've already made. The money sits inside your loan — it belongs to the lender until you redraw it.
- For investors, offset is almost always superior: redrawing from an investment loan for personal use can 'contaminate' the loan and permanently reduce your tax deductions.
- For owner-occupiers, redraw is often the more cost-effective option — it's typically free, while offset accounts commonly come with annual package fees of $350–$450.
- As of December 2025, Australian borrowers held over $327 billion in mortgage offset accounts — up 23% in two years — making this one of the most widely used mortgage features in the country.
Every Australian with a mortgage has probably heard the advice: 'Put your savings in an offset account.' It's common advice, and often correct. But whether an offset account is right for you — or whether a redraw facility achieves the same result at lower cost — depends on your situation, especially whether you're an owner-occupier or an investor.
This guide explains both features clearly, compares them across every dimension that matters, and gives you a framework to choose the right structure for your circumstances.
How an Offset Account Works
An offset account is a transaction account held at the same institution as your home loan, linked directly to it. The balance in this account is offset against your loan balance daily when interest is calculated.
Worked Example: Offset in Action Your home loan balance is $550,000. You have $60,000 sitting in your linked offset account. The bank calculates interest only on $490,000 ($550,000 minus $60,000). At 6.4% interest, this saves you $3,840 per year compared to having no offset account. You can use the offset account exactly like a regular transaction account — BPAY, debit card, direct debits, transfers. The money is yours and fully accessible at any time.
Key characteristics of offset accounts:
The money stays in the offset account — it does not reduce your loan principal. Your minimum repayments stay the same.
Interest is calculated daily, so even short-term cash holdings (like your salary between pay day and bill day) reduce your interest charge.
Offset accounts are typically available only on variable rate loans. Most lenders do not offer offset on fixed rate loans, and those that do offer only partial offset.
Most lenders charge a package fee (typically $350–$450 per year) for loans that include an offset account feature.
The ATO treats money in an offset account as your personal savings — not as part of the loan. This distinction is critical for investors.
How a Redraw Facility Works
A redraw facility is not a separate account — it is a feature built into your home loan itself. When you make repayments above your minimum, those extra funds reduce your loan balance immediately. The redraw facility allows you to access those extra repayments later if you need them.
Worked Example: Redraw in Action Your loan balance is $550,000. Your minimum monthly repayment is $3,400. You pay $4,000 per month — $600 extra. After 12 months, you have $7,200 available in redraw. Interest is calculated on your actual loan balance, which now sits at $542,800 (approximately). Your extra repayments have reduced the principal by $7,200, saving you the interest on that amount.
Key characteristics of redraw facilities:
Most variable rate loans include redraw at no extra cost. Fixed rate loans typically restrict redraw to $10,000–$20,000 per year without break costs.
Extra repayments reduce your loan principal immediately — making redraw slightly more effective at reducing your loan balance than offset.
Access to redraw may not be instant. Some lenders take 1–3 business days to process a redraw request.
When you redraw funds, the ATO treats this as a new borrowing — and the deductibility depends on how those redrawn funds are used. This has major implications for investors.
Side-by-Side Comparison
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| How it works | Separate account; balance offsets loan interest daily | Extra repayments reduce loan balance; accessible via redraw |
| Effect on interest | Same — reduces effective balance charged interest | Same — reduces effective balance charged interest |
| Access to funds | Instant — works like a transaction account | May take 1–3 days; some lenders charge a fee |
| Ownership of funds | Your money — clearly separate from the loan | Technically part of the loan; bank controls access |
| Available on fixed rate? | Rarely; most fixed loans don't offer full offset | Yes, but typically capped at $10,000–$20,000 per year |
| Annual cost | $350–$450 package fee (most lenders) | Usually free |
| Tax implications (investors) | Withdrawals don't affect loan purpose or deductibility | Redrawing for personal use can permanently reduce deductions |
| Best for | Investors; borrowers with large, consistent savings | Owner-occupiers; disciplined savers; cost-conscious borrowers |
The Critical Tax Difference for Investors
This is the most important distinction in this entire article for anyone who owns or is planning to buy an investment property.
Under ATO Taxation Ruling TR 2000/2, the deductibility of interest on a redraw depends on how the redrawn funds are used — not on the original purpose of the loan. The ATO treats each redraw as a new borrowing.
The Loan Contamination Problem Marcus has a $400,000 investment property loan with a redraw facility. He's made extra repayments and has $30,000 available to redraw. He redraws $30,000 to fund a family holiday (personal use). His loan balance is now $430,000 — but only $400,000 relates to the investment property. From now on, only 93% ($400,000/$430,000) of his interest is deductible. For a loan at 6.4%, that's $1,920 per year permanently lost as a deduction — which at a 37% tax rate costs him $710 per year in extra tax. Forever. Even if he makes the $30,000 back in extra repayments, the contamination remains.
With an offset account, this problem does not exist. Your savings are in a separate account — they are your personal money. Withdrawing from the offset account for personal use has absolutely no effect on the deductibility of the loan interest.
Which Is Right for You?
Choose a Redraw Facility if:
You're an owner-occupier with no investment properties and no plans to convert your home to an investment property.
You're a disciplined saver who makes consistent extra repayments and rarely needs to access those funds.
You want to minimise loan fees and the package fee cost isn't worth paying for your savings balance.
Choose an Offset Account if:
You own or plan to own an investment property — even in the future. The contamination risk alone justifies offset.
Your home might eventually become a rental property (e.g. if you move to a bigger home).
You hold large cash balances — salary, emergency fund, savings. The larger your average offset balance, the more the interest saving outweighs the annual fee.
You want seamless everyday access to your funds without waiting 1–3 days.
The Offset Break-Even Calculation At a 6.4% interest rate, you need an average offset balance of approximately $5,470 to save $350 per year in interest (the typical package fee). If your average offset balance is consistently above this, offset accounts pay for themselves. For most working Australians who hold their salary in the offset between pay days, this threshold is easily cleared.
Practical Tips for Getting the Most From Either Feature
Direct your salary into your offset account (or onto your loan for redraw). The interest is calculated daily — even a few weeks of salary offsetting saves money.
Keep your everyday bills account separate from your offset. This reduces the temptation to treat the offset like a general spending account and maintain a higher average balance.
If using redraw on an investment property, consult your accountant before every redraw. Understand what the funds will be used for and whether that use is income-producing.
Some lenders allow multiple offset accounts linked to one loan — useful for 'buckets' (emergency fund, holiday savings, renovation fund) that all offset your mortgage interest while staying separated psychologically.
Frequently Asked Questions
Does money in a redraw or offset account affect my minimum repayments?
No. Your minimum repayment is set by your loan contract based on the outstanding balance and interest rate. Money in offset or redraw doesn't change your minimum. However, offsetting or redrawing reduces interest charged, meaning more of each repayment goes toward principal — effectively paying your loan down faster.
Can I have both an offset account and a redraw facility?
Yes. Many lenders offer loans with both features. Typically, the offset account is linked for day-to-day banking, while extra repayments build up in redraw.
Is the interest saving from an offset account taxable?
No. Reducing the interest you pay on your home loan via an offset account is not assessable income. It is simply paying less interest — not earning interest. This compares favourably to a savings account, where interest earned is taxable income.
Disclaimer: This article is general information only and does not constitute financial or tax advice. The tax implications of offset accounts and redraw facilities — particularly for investment properties — depend on your specific loan structure, ATO rulings, and individual circumstances. Consult a qualified mortgage broker and registered tax agent before making structural decisions about your home or investment loan.
Written by Luke Drake | Authorised Credit Representative (CRN: 565112) | Frontier Finance Co