What they have in common
Both an offset account and a redraw facility reduce the interest charged on your home loan by lowering the balance on which interest is calculated. If you have spare cash sitting somewhere, using it against your mortgage is generally more tax-effective than a savings account: the interest saved on a loan is not taxable income, while interest earned in a savings account is.
Beyond that similarity, they work quite differently. The distinction matters most if you might ever convert your home to an investment property.
How an offset account works
An offset account is a separate transaction account linked to your mortgage. Each day, the bank calculates interest on the difference between your loan balance and your offset balance, not on the full loan.
If you have a $600,000 loan and $40,000 in your offset account, you pay interest on $560,000. Your minimum repayment does not change, but because less of each payment covers interest, more goes toward reducing the principal.
The money in the offset account remains fully accessible at any time. It functions like a regular transaction account: you can spend from it, receive your salary into it, and the offset effect applies to whatever balance is there each day.
How redraw works
Redraw is a feature built into some mortgage accounts. When you make repayments above the minimum, those extra funds reduce your loan balance. Unlike an offset account, the money sits inside the loan itself rather than in a separate account.
If your minimum repayment is $3,000 per month and you pay $3,600, the extra $600 reduces the loan balance and therefore the interest charged. You can later access (redraw) those extra repayments, effectively reborrowing them.
The critical difference for investors
This is where the choice between the two becomes genuinely important, and where many property investors make a costly mistake.
Tax deductibility of mortgage interest depends on the purpose of the borrowing, not just the loan balance. If you have an investment property with a $500,000 loan and make $50,000 in extra repayments, your balance drops to $450,000. If you later redraw that $50,000 for a personal purpose (renovating your own home, buying a car, or taking a holiday), those funds are now borrowed for non-investment purposes.
The ATO considers the interest on that redrawn $50,000 to be non-deductible because the money is no longer being used for income-producing purposes. The deductibility of part of your investment loan has been permanently contaminated.
With an offset account, the loan balance stays at $500,000 throughout. Your savings sit in a separate account. If you spend those savings on a personal expense, the loan balance is still $500,000 borrowed for investment, fully deductible. The purpose of the borrowing has never changed.
Other practical differences
- Access speed. Offset account funds are available immediately like a normal bank account. Redraw may take time to process, and some lenders impose minimum redraw amounts or fees.
- Lender discretion. Redraw facilities are technically at the lender's discretion. While lenders rarely restrict access in normal conditions, some have frozen redraw access during periods of financial stress. Offset funds are in a separate account in your name.
- Loan fees. Offset accounts are more commonly available on variable-rate loans or certain packaged products. Some lenders charge higher annual fees or rates on loans with offset accounts compared to basic variable loans with only a redraw facility.
- Fixed-rate loans. Most lenders do not offer a full offset on fixed-rate loans. Redraw is more commonly available on fixed products, though with restrictions. This is one tradeoff of fixing your rate.
Which to use
- Owner-occupiers with no investment plans. Either works for interest savings. Redraw is simpler and may come with lower fees on a basic loan. The tax contamination risk does not apply to a principal residence.
- Investors and property owners who may rent the property. An offset account is strongly preferred. The contamination risk with redraw is a genuine tax problem, not a theoretical concern.
- Anyone who might convert their home to an investment property. Using an offset from the start preserves maximum flexibility. Switching once the property becomes an investment may be too late to undo earlier redraw activity.
Common misconceptions
"Redraw is just as good as offset for investors"
For pure interest savings on a home you never rent out, the mechanical effect is similar. For investors who ever need to access those extra repayments, the tax treatment diverges significantly. The contamination risk with redraw is a real and lasting problem.
"Money in an offset account earns interest"
It saves interest rather than earning it, but the effect is equivalent at the loan rate. If your loan rate is 6%, your offset balance saves 6% per year on that amount. Because the saving is not technically interest income, it is not taxable, which makes it more effective than holding the same cash in a high-interest savings account for those on higher marginal rates.
"An offset and a linked savings account are the same thing"
A savings account earns interest (say 4.5%) which is taxable income. An offset account saves interest at the loan rate (say 6%) which is not taxable. At higher marginal rates, the after-tax benefit of the offset can be considerably better.
Frequently asked questions
Can I have both an offset account and a redraw facility?
Some loan products offer both. In practice, most borrowers use one or the other. If you have both, extra repayments made into the loan create redraw availability, while funds in the offset account reduce interest separately.
How much interest does an offset account actually save?
The saving equals your loan's interest rate applied to the average offset balance over the year. At a 6% loan rate with an average $35,000 in offset, you save roughly $2,100 in interest annually. That saving also reduces the principal more quickly, which compounds the benefit over the remaining loan term.
Does an offset account work on a fixed-rate loan?
Generally not at full offset. Some lenders offer a partial offset on fixed products, but most full offset accounts are only available on variable-rate loans or certain packaged deals. This is one practical consideration when deciding whether to fix.
Model the interest savings from an offset account with the Mortgage Repayment Calculator. For the broader rent-versus-buy decision and true cost of home ownership, see Rent vs Buy in Australia.