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Offset account vs redraw: how each works on your home loan

Christian Tucker
4 days ago
6 min read

Updated: 2 days ago

Insights from AGFB · Checked 2 October 2026 · About 6 minutes

In brief

  • An offset account and a redraw facility both cut interest by lowering the balance your lender charges interest on. The same dollars save about the same interest either way.

  • An offset works like an everyday bank account. Redraw money is extra you have already paid into the loan, and the lender's terms decide how you get it back.

  • An offset can cost more through a higher rate, account or package fees, and fixed-rate loans often limit both features.

  • If your home could become an investment property later, the choice can change the tax outcome. Speak with your accountant before you decide.

How does each one reduce interest?

An offset account is a separate transaction or savings account linked to your home loan. On most loans, interest is worked out daily on the loan balance minus the offset balance. The loan balance itself does not change.

A redraw facility works differently. You make extra repayments into the loan, which lowers the balance directly, and redraw lets you take those extra amounts back out later.

A hypothetical example

Say you have a $600,000 variable loan at a hypothetical 6.50% a year (an example rate only, not an offer). You keep $40,000 in a full offset account for the whole year, so interest is charged on $560,000 instead of $600,000.

That saves about $40,000 × 6.50% = $2,600 in interest over the first year. If your repayments stay the same, the saving goes off the principal, so on a 30-year loan the first-year saving comes out a little higher, at around $2,680.

Paying the same $40,000 into the loan as extra repayments would save about the same. The real differences lie elsewhere.

How easily can you get to your money?

Money in an offset account stays yours as savings. You can usually use it like any transaction account, with a card, transfers and your pay going in, though every dollar you take out raises the interest you pay.

Redraw money has already been paid to the lender. Getting it back usually means a redraw request through online banking or the lender, and the funds may not arrive instantly.

On 29 September 2026 the Reserve Bank raised the cash rate target by 0.25 percentage points to 4.60%, effective 30 September. If that has you thinking about a larger cash buffer, both features can hold one, but an offset keeps it closer to hand.

What does each feature cost?

Redraw is part of the loan itself, though some lenders charge a fee when you use it. An offset can cost more: some lenders charge for it through a higher interest rate, account fees or both.

A package may bundle the offset with other features for an annual fee, so weigh the whole package against the interest your realistic balance would save. Moneysmart notes that if your balance stays low, for example under $10,000, paying for an offset may not be worth it.

Full or partial offset

A full (100%) offset counts every dollar in the account against the loan. A partial offset counts only a set share, so $40,000 in a 40% offset would reduce the balance charged interest by $16,000. Check which kind you are offered and whether more than one account can be linked.

What limits apply to redraw?

Redraw is a feature of the loan contract rather than a bank account, so the lender's terms decide how it works. Some lenders set a minimum redraw amount, limit how much you can take, charge a fee or delay access.

Loan terms may also let a lender change or restrict redraw over time. Treat redraw money as available on the lender's terms, not as cash you can always reach.

What about fixed-rate loans?

Fixed-rate loans often come with fewer features. Some don't offer an offset, and some limit extra repayments during the fixed period, which caps how much can build up for redraw.

Refinancing, selling or paying the loan out early during the fixed period may also trigger a break fee. Splitting the loan into fixed and variable parts is one way some borrowers keep an offset or redraw on the variable portion.

The tax difference if your home may become a rental

This is where the choice can matter most. The ATO's ruling on redraw facilities, TR 2000/2, treats money you redraw as a new borrowing. Whether interest on it is deductible depends on what you use the redrawn money for, not on what the loan was first taken out for.

Offset money is treated differently. In private rulings, which apply only to the person who asked, the ATO has said that depositing into an offset does not reduce the loan balance, and taking money out is not a borrowing.

Say you paid $100,000 extra off your home loan, then redrew it for the deposit on a new home and rented out the old one. The redrawn $100,000 would generally be a new borrowing for a private purpose, so interest on it is unlikely to be deductible.

If the same $100,000 had sat in an offset and you withdrew it for the deposit, the loan balance from buying the original home would be unchanged. Interest on that balance may be deductible once the property is rented.

Tax outcomes depend on your full circumstances, so if there is any chance your home becomes a rental, speak with your accountant before you choose a structure or move money.

Which may suit you?

These are factors to weigh, not a recommendation.

Factors that point towards an offset

You expect to keep a meaningful balance, such as savings, an emergency buffer or your pay. You want everyday access to that money, or the home might become an investment property later. The added cost is small next to the interest your likely balance would save.

Factors that point towards redraw

Your spare cash is modest or irregular, and you would prefer a simpler loan without a package fee. You like extra money being a little harder to spend, and you expect the home to remain your own home.

Questions to ask before you choose

  • Is the offset full or partial, and can more than one account be linked?

  • What does the offset add in rate or fees, and is there an annual package fee?

  • What balance would you realistically keep, and how much interest would it save?

  • Are there minimums, fees, limits or delays on redraw, and can the lender change them?

  • If you fix the rate, what happens to offset, redraw and extra repayments, and could a break fee apply?

  • Could this home ever become a rental? If so, speak with your accountant first.

Common questions

Does an offset account lower my repayments?

Usually not. On most principal-and-interest loans the repayment stays the same, so more of it goes to principal and the loan may be paid off sooner. Check how your lender handles this.

Can I switch from redraw to an offset later?

Often, yes, by moving to a different product with your lender or by refinancing. That can involve fees, a fresh assessment and, on a fixed rate, a possible break fee.

Try the numbers

Use our Repayments calculator to see how a lower balance changes your repayments and interest, or start with Find Your Next Step, a short guided set of questions that points you to the right tool or enquiry. Our home loans page explains how Christian compares loan features across lenders.

Talk it through

Christian can compare how different lenders handle offset, redraw and split loans for your situation.

Sources

General information only. This article does not take into account your objectives, financial situation or needs. Your full financial situation and requirements must be considered before any offer or acceptance of a loan product. It is not tax or legal advice; speak with your accountant or adviser. All lending is subject to the lender's assessment and criteria, and fees and charges apply. Figures and rules are correct as at the checked date shown and can change.

Avantgarde Financial Brokerage Pty Ltd, Corporate Credit Representative 580346, authorised under Australian Credit Licence 389328 held by Connective Credit Services Pty Ltd.

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