Offset vs Redraw
What is the difference between an offset account and a redraw facility?
By Andrew, franklenn FINANCE 6 min readUpdated 3 November 2026
The short answer
An offset account is a transaction account linked to your home loan, where the balance reduces the amount you pay interest on. A redraw facility lets you take back extra repayments you have made into the loan. Both can save the same amount of interest, but an offset keeps your money separate and easier to access, while redraw money is part of the loan. The difference matters most if you might later turn your home into an investment property.
Detailed explanation
How an offset account works
An offset account looks and works like an everyday bank account. You can have your pay go into it and use a debit card. The difference is that the balance is offset against your loan, so you only pay interest on the loan amount minus the offset balance.
For example, with a $500,000 loan and $40,000 in offset, you pay interest as if the loan were $460,000. Your repayment usually stays the same, so more of each repayment goes to principal and the loan is paid off faster.
Because the saving is a reduction in interest rather than interest earned, it is not taxed. For someone on a higher marginal tax rate, that can make an offset noticeably more valuable than a savings account paying a similar rate.
How redraw works
With redraw, you put extra money directly into your loan. That lowers the balance and the interest charged. If you need the money later, you can redraw it, up to the amount you have paid ahead.
Lenders may set minimum redraw amounts, charge fees or limit how you access it. Some lenders can also reduce or freeze available redraw in certain circumstances, so it is not quite the same as having cash in the bank.
Some people like redraw precisely because the money is a little harder to get to. If you tend to spend what is in your everyday account, keeping savings in the loan can be a useful bit of discipline.
Why the difference matters for tax
If you live in the property, the interest saving from offset and redraw is much the same. The big difference shows up if you later move out and rent the property.
With an offset, you can move money out and the loan balance stays the same, so the full loan may remain tax deductible as an investment loan. With redraw, taking money out is generally treated as new borrowing, and its tax deductibility depends on what you use it for. This is general information, not tax advice, so talk to your accountant.
We see this often with people who buy a first home they later keep as an investment. Setting up the loan with an offset from the start can preserve options down the track, so it is worth thinking about your five to ten year plans before you settle.
Which one suits you
Offset accounts often come with packaged loans that may have an annual fee or a slightly higher rate. Redraw is usually free and available on basic variable loans. Fixed rate loans often limit or exclude both, though some offer partial offset.
As a broad guide, offset suits people who hold larger cash balances, want easy access, or may turn the home into an investment later. Redraw can suit people who want a simpler, cheaper loan and are happy to keep extra money in the loan.
- Offset: separate account, easy access, better flexibility for future investment use
- Redraw: often cheaper, less tempting to spend, but access can be restricted
- Both: reduce interest by lowering the balance you are charged on
Worked example
Interest saved with $38,600 in offset on a $574,300 loan
Here is an illustrative example using a $574,300 loan at 5.89% p.a. and a steady $38,600 offset balance. The same saving would apply if the $38,600 were in redraw instead.
| Loan balance | $574,300 |
| Offset balance | $38,600 |
| Balance interest is charged on | $535,700 |
| Monthly interest without offset | $2,818.86 |
| Monthly interest with offset | $2,629.39 |
| Interest saved per month / per year | About $189 / about $2,274 |
Keeping $38,600 in offset saves about $2,274 in interest a year in this example, and that saving is tax free because it is a reduction in interest rather than income. Over time, the extra principal paid can shorten the loan.
Illustrative only. Figures are examples, not a quote or a recommendation.
Common mistakes
- Paying for a package with an offset account but keeping only a small balance in it
- Using redraw on a home you may later rent out without understanding the tax impact
- Assuming redraw funds are always available when you need them
- Choosing a fixed rate loan without checking whether offset or redraw is allowed
- Keeping savings in a separate high interest account when the offset saves more after tax
Frequently asked questions
Next steps
Talk to franklenn FINANCE
Not sure whether offset or redraw suits your plans? Book a free discovery call with franklenn FINANCE and we will look at your situation and future plans together.
This guide is general information only and does not consider your objectives, financial situation or needs. It is not financial, tax or legal advice. Lender policies, rates and government schemes change. Please speak with us, and with your accountant or solicitor where relevant, before acting.