Redraw Facilities vs. Offset Accounts: Which One Is Right for You?
When managing a home loan, many borrowers look for ways to reduce their interest costs and pay off their mortgage sooner. Two of the most effective tools for doing this are redraw facilities and offset accounts. While they share some similarities, they operate differently and suit different financial goals.
Choosing the right option depends on understanding their features, benefits, and limitations — and how these align with your personal situation.
This guide explains how redraw facilities and offset accounts work, compares their key differences, and helps you decide which may be the better fit for your needs.
What Is a Redraw Facility?
A redraw facility allows you to access extra repayments you’ve made on your home loan. When you pay more than the required minimum, these additional funds reduce your loan balance, lowering the interest charged. However, you can later access (or “redraw”) these funds if needed.
Key Features of a Redraw Facility:
- Interest savings: Extra repayments lower your loan balance and reduce the interest charged.
- Access to funds: You can withdraw additional repayments when needed, though conditions may apply.
- Built-in discipline: Redraws often require formal requests, helping discourage casual spending.
Example:
If your loan balance is AUD 400,000 and you make an extra AUD 20,000 repayment, interest is calculated on AUD 380,000. If an emergency arises, you can access the AUD 20,000 through the redraw facility.
What Is an Offset Account?
An offset account is a separate transaction account linked to your home loan. The balance in the offset account reduces the portion of your loan on which interest is calculated. Unlike a redraw facility, the funds remain instantly accessible.
Key Features of an Offset Account:
- Interest savings: Money in the account reduces the balance used to calculate loan interest.
- Flexibility: You can access funds anytime without restrictions.
- Separation from loan principal: The balance doesn’t technically reduce your loan, preserving flexibility.
Example:
If you have a AUD 400,000 loan and AUD 20,000 in an offset account, your lender calculates interest on AUD 380,000 — while you still have instant access to your AUD 20,000.
Comparing Redraw Facilities and Offset Accounts
Here’s a breakdown of how the two options differ:
| Feature | Redraw Facility | Offset Account |
| Access to funds | Requires formal request; may have delays or limits | Instant and unrestricted access |
| Interest calculation | Directly reduces loan principal | Reduces interest without affecting loan balance |
| Flexibility | Less flexible | Highly flexible; functions like a transaction account |
| Fees | May have redraw fees or limits | May have monthly or annual account fees |
| Tax implications | Redrawn funds can affect deductibility on investment loans | Maintains loan balance, preserving deductibility |
Advantages and Disadvantages
Redraw Facility
Advantages:
- Immediate interest savings by lowering the principal.
- Encourages disciplined savings behavior.
- Generally lower or no account-keeping fees.
Disadvantages:
- Withdrawals may involve delays or limits.
- For investment loans, redrawing funds can complicate tax deductions.
- Less flexibility compared to offset accounts.
Offset Account
Advantages:
- Easy and immediate access to funds.
- Maintains full interest deductibility for investment loans.
- Reduces loan interest without touching the principal.
Disadvantages:
- May come with monthly or annual account fees.
- Easier access can lead to spending temptation.
- Not always available with fixed-rate loans.
When to Choose a Redraw Facility
A redraw facility may be better if you:
- Want a disciplined approach to saving on your mortgage.
- Don’t plan to maintain large savings balances.
- Prefer to minimize account fees.
- Are an owner-occupier without complex tax considerations.
When to Choose an Offset Account
An offset account may be better if you:
- Value maximum flexibility and want instant access to funds.
- Maintain substantial savings balances that can significantly reduce loan interest.
- Have an investment loan where maintaining tax deductibility is critical.
- Want to combine your savings and day-to-day banking in one account.
Tax Considerations for Investment Properties
For investment loans, tax implications can be significant:
- Redraw facility: Withdrawing extra repayments may reduce the tax-deductible portion of the loan if the funds are used for personal purposes.
- Offset account: Since the loan principal stays unchanged, the full loan interest generally remains tax-deductible.
It’s wise to consult a financial adviser or tax professional before making a decision if you have an investment property.
Practical Tips for Choosing the Right Option
- Assess your goals: Are you saving for a specific purpose or just looking to reduce interest?
- Compare costs: Weigh offset account fees against potential interest savings.
- Review your loan type: Not all loans offer both features, especially fixed-rate loans.
- Estimate your savings: Use mortgage calculators to see how much you can save with each option.
- Get expert advice: Speak to your lender, broker, or financial adviser to align your choice with your broader financial plan.
Case Study: Redraw vs. Offset
Scenario:
Emily has a AUD 500,000 mortgage at 5% and AUD 30,000 in savings.
- Redraw Facility: Emily pays the AUD 30,000 directly into her home loan, reducing the balance to AUD 470,000. She saves on interest and shortens her loan term but has less immediate access to funds.
- Offset Account: Emily deposits the AUD 30,000 into an offset account, reducing the loan’s interest calculation to AUD 470,000 but retaining instant access to her savings.
Outcome:
Emily chooses the offset account because she values liquidity and flexibility. If her priority were discipline and simplicity, the redraw facility might have been the better fit.
Final Takeaway
Both redraw facilities and offset accounts can help you save on mortgage interest, but the right choice depends on your priorities:
- Choose a redraw facility if you want disciplined savings, lower fees, and don’t need regular access to funds.
- Choose an offset account if you need flexibility, maintain higher savings balances, or have an investment loan with tax considerations.
By understanding the differences and aligning them with your financial goals, you can make a confident decision that helps you save money and pay off your home loan sooner.
