Offset account or redraw: why the difference matters

How an offset account works

An offset is a separate transaction account linked to an eligible home loan. Its balance reduces the portion of the loan on which interest is calculated. If the loan is $700,000 and the linked offset holds $50,000, interest is generally calculated on $650,000 while that balance remains there.

The money remains in a transaction account and can usually be accessed for everyday spending. Offset features are commonly attached to variable-rate loans and may come with package fees, account fees or a higher rate than a basic loan.

How redraw works

Redraw is access—subject to the loan terms—to repayments made above the required minimum. The extra repayment reduces the loan balance and therefore the interest charged. Withdrawing it increases the balance again.

Access is controlled by the loan contract and lender. Minimum redraw amounts, limits, processing times and feature availability can differ. A lender may also change access in circumstances permitted by the contract.

Why future property use matters

For Australian tax purposes, the use of borrowed funds is relevant to whether interest is deductible. If a home later becomes an income-producing rental and previous extra repayments are redrawn for a private purpose, the loan can become mixed-purpose. Interest may then need to be apportioned, potentially for the remaining life of the loan.

Taking money from a genuine offset account does not itself redraw a new amount from the loan. That distinction can be important for someone who may turn their home into an investment property. Tax outcomes depend on the facts, so obtain tax advice before changing or redrawing a loan.

An offset is only valuable when it is working

ASIC’s Moneysmart recommends checking that the offset is correctly linked, especially after refinancing or switching products. Compare the expected interest saving with any additional rate or fees. A feature that costs more than it saves is not automatically good value.

Interest is commonly calculated daily, so regular salary credits and maintaining a higher average balance can improve the benefit. But using a credit card to keep money in offset only works if the card is paid in full and on time.

When each option may suit

• Offset may suit borrowers who want transaction-account access, maintain meaningful savings and value future structural flexibility.
• Redraw may suit disciplined borrowers who want to make extra repayments and do not need the same everyday access.
• A basic loan without either feature may be better value if balances will remain low and the feature adds cost.
• Multiple offsets or loan splits may help with cash management, but only where the benefit justifies the complexity and cost.