Offset account vs redraw facility

What is the difference between an offset account and a redraw facility?

An offset account is a transaction or savings account linked to a loan, and its balance is subtracted from the loan balance when interest is calculated. A redraw facility is a feature inside the loan that lets you take back extra repayments you have already made. Both aim to cut the interest you pay by keeping the effective balance lower, but they work in different ways.

Ownright Custom Finance arranges home and investment loans Australia-wide, and director Trevor Scott has watched borrowers choose between these features for four decades. This guide sets out how each works, where they differ and the questions worth asking before you pick a loan.

How does an offset account work?

Think of it as a partner account. You hold your own money in an account that is linked to your loan. When the lender works out interest, it looks at the loan balance minus the offset balance and charges interest on the difference. The cash stays in your name, and you can usually use the account for everyday banking, with a card, transfers and direct debits.

To illustrate with made-up round numbers and no rates: if a loan balance is $500,000 and there is $50,000 in the offset account, interest is calculated as if the loan were $450,000 for that period. The loan balance itself does not change. If you take the money out, the offset benefit disappears, but the loan remains exactly as it was.

Offset accounts are usually attached to variable loans, though some lenders offer limited versions on fixed loans. They can be partial or full. A partial offset only nets off part of the balance, so read the terms.

How does a redraw facility work?

When you pay more than your required repayment, the extra goes against the loan. That lowers the balance and reduces interest, and many loans then let you withdraw the surplus later. That is redraw.

Redraw is borrowed money you are taking back, not a deposit. In practice, you request a redraw from the lender and it arrives in a linked account, sometimes the same day and sometimes after processing. Lenders can set a minimum redraw amount, a limit on how often you can redraw, a fee or conditions about the loan staying up to date. In certain circumstances, such as arrears, redraw can be restricted.

Offset vs redraw: a side-by-side comparison

Feature	Offset account	Redraw facility
What it is	Separate account linked to the loan	Part of the loan itself
Whose money	Your deposit	Extra loan repayments
Effect on loan balance	Loan balance unchanged	Loan balance reduced by extra repayments
Effect on interest	Interest charged on balance less offset	Interest charged on the lower balance
Everyday use	Often has a card and transfers	Usually need to request a redraw
Access limits	Typically none	Can have minimums, fees or limits
Availability	Mostly variable loans, may need a package	Common on variable loans, less on fixed
Tax on investment loans	Depends on how the loan was used	Redrawing can create a mixed-purpose loan

Which suits which borrower?

Offset tends to appeal to people who:

• want to keep savings separate and instantly available;
• have a wage or business income passing through the account;
• are keeping a home loan for a long time, such as when moving out of a property and renting it out.

Redraw can suit people who:

• like the discipline of paying extra into the loan and not seeing the money in an everyday account;
• want a simpler loan with fewer moving parts;
• have a lender that offers free redraw but charges for offset.

This is general information. The right option depends on your loan, the fees and your habits, and a broker can compare actual products.

Does it matter for tax and investment property?

For an owner-occupied home, there is no tax deduction on loan interest, so the main aim is simply to reduce the interest you pay. For an investment property, the ATO says the deductibility of loan interest depends on what the borrowed money was used for. If you redraw money from an investment loan and use it for private purposes, the interest on that portion generally is not deductible. A mixed-purpose loan can also make record keeping harder.

An offset account does not change the loan, so it is often considered tidier in an investment setting, but the details turn on your circumstances. Speak to an accountant. If you are comparing structures for a property purchase, our investment property loans page is a good place to start.

What do lenders look at?

Offset and redraw are product features, but a lender still assesses you in the usual way:

• income and employment history, including self-employed income;
• existing debts and living expenses;
• the property, its value and the loan to value ratio, covered in what is LVR;
• credit history and recent enquiries;
• whether the loan is variable or fixed, see fixed vs variable loans explained.

The feature set can also depend on the loan type. An interest-only loan behaves differently from principal and interest, which we cover in interest-only vs principal and interest. Some lenders restrict redraw on interest-only periods, since there are no principal repayments to redraw.

How does Ownright approach it?

Most borrowers who come to us are not shopping for an offset account first. They are working out how to get the loan approved, particularly when income is irregular, a bank has said no or there is a tax debt in the background. Once the loan structure is workable, we look at whether an offset, redraw or both would suit. Our offset and redraw home loans page explains what we can look at, and home loan refinance is worth a look if your current loan lacks the features you want.

If the main hurdle is getting a lender to say yes, self-employed home loans and low doc loans may be the more relevant starting points.

Questions to ask before choosing

1. Is the offset account full or partial?
2. Is there a fee for the offset or for redraws, and is it ongoing?
3. Are there limits on how often or how much I can redraw?
4. What happens to redraw if I fall behind or the loan term ends?
5. If I plan to rent the property out later, how will the structure affect my records?
6. Does the feature come with a package fee that cancels out the benefit?

Mistakes to avoid

• Parking money in a partial offset and assuming the whole balance is netted.
• Paying extra into a loan with no redraw, then finding the money cannot come back out.
• Redrawing from an investment loan for private spending without taking tax advice.
• Choosing a loan only because it has an offset, while overlooking higher fees elsewhere.
• Forgetting that redraw can be restricted, which could matter if you need the cash in a hurry.

A worked comparison with round numbers

The following example is illustrative only and carries no rates. Two borrowers each have a loan balance of $400,000 and each has $40,000 of spare cash.

• Borrower A keeps the $40,000 in an offset account. The loan balance stays at $400,000, but interest is worked out as though it were $360,000. If an emergency arises, the cash can be spent as normal and the offset benefit simply stops.
• Borrower B pays the $40,000 into the loan as an extra repayment. The balance falls to $360,000 and interest is worked out on that. If an emergency arises, Borrower B requests a redraw, subject to the lender’s rules, and the balance rises again.

On paper the interest saving can be similar for the period the money sits there. The differences show up in access, fees, record keeping and what happens if the lender restricts redraw or changes the product. That is why the conversation is as much about flexibility as about interest.

What happens when you refinance or sell?

An offset balance is yours, so when the loan is paid out you simply move the money. A redraw balance is part of the loan, so it effectively comes back to you as the loan reduces at settlement. If you are planning a refinance, check how much redraw is available, whether it must be withdrawn before the loan closes and whether the new loan has the features you want. Lenders that restructure a loan, move it to interest-only, or change its terms sometimes alter or remove redraw rights, so ask before the change goes through.

For self-employed borrowers, an offset account can also double as a place to park tax money, such as GST or PAYG set-asides, while still reducing interest in the meantime. That only works if the funds are really kept for the bill, and your accountant can advise on that approach.

Sounds like a home loan with the right features?

Sounds like you’re looking for a home loan that works for the way you manage money. We’re the lending experts in structuring home loans with offset, redraw and the flexibility you need, so see if you qualify with the button below.