Both offset accounts and redraw facilities let you park extra funds against your home loan and reduce the interest you pay, but they work differently and the distinction matters when you need access to your money.
How an Offset Account Works
An offset account is a transaction account linked to your home loan. The balance in the offset account reduces the amount of interest charged on your loan without reducing the loan balance itself. If you have a $400,000 home loan and $30,000 sitting in a linked offset, you only pay interest on $370,000. The money in the offset remains yours, accessible any time through normal banking channels like a debit card, internet transfer, or EFTPOS.
Most lenders offering offset accounts provide a 100% offset, meaning every dollar in the account reduces your interest by the full amount. Some lenders offer partial offsets, typically around 40% to 60%, which only reduce your interest by that proportion. A 100% offset is standard with most variable rate home loans from major lenders, though it's less common with fixed rate products.
How a Redraw Facility Works
A redraw facility allows you to make extra repayments on your home loan above the required minimum, then withdraw those extra funds if needed. The extra repayments reduce your loan balance and the interest you pay. If you have a $400,000 loan and make $30,000 in additional repayments, your loan balance drops to $370,000. You can then apply to redraw some or all of that $30,000, which brings your loan balance back up.
The key difference is that once you make an extra repayment into a loan with redraw, that money technically belongs to the lender until you request it back. Redraw is usually available online or through your lender's app, but some lenders charge a fee per redraw transaction or limit the number of free redraws you can make each year. Others place a minimum redraw amount, such as $500 or $1,000. Some lenders reserve the right to restrict or suspend redraw access in certain circumstances, though this is uncommon in standard lending scenarios.
Why Offset Accounts Are Preferred for Investment Loans
If you're borrowing to buy an investment property, an offset account keeps the loan balance unchanged, which means the full interest on the loan remains tax-deductible. Using redraw to make extra repayments reduces the loan balance, and if you later redraw funds for personal use, the interest on the redrawn portion is no longer deductible. The ATO treats the redrawn amount as a new loan for personal purposes, not investment purposes.
Consider an investor with a $500,000 loan secured against a rental property in Perth. They make $40,000 in extra repayments through redraw, dropping the loan balance to $460,000. A year later, they redraw $40,000 to renovate their own home. The interest on that $40,000 is now personal and not deductible, even though the original loan was for investment. If they had kept the $40,000 in an offset account instead, the loan balance would have remained at $500,000, and the full interest would still be deductible. This distinction can mean thousands of dollars in lost deductions over time.
Offset Accounts and Ongoing Access
Offset accounts give you the same access to your money as any standard transaction account. You can deposit your salary, pay bills, and withdraw cash without needing lender approval. For borrowers who want flexibility or who may need funds at short notice, this is a significant advantage. The money is never considered part of the loan, so there's no approval process or restriction on how often you access it.
Redraw access can be more restrictive. While many lenders now offer instant online redraw at no cost, some still impose fees ranging from $20 to $50 per redraw or cap the number of fee-free redraws per year. If your lender charges $30 per redraw and you need to access funds four times in a year, that's $120 in fees. Some borrowers in our experience have been caught out by minimum redraw amounts, discovering they can't access smaller sums when needed for minor expenses or urgent repairs.
Offset Accounts Cost More Upfront
Loans with offset accounts typically come with a higher interest rate or an annual package fee. The rate difference is often between 0.10% and 0.30% per year compared to a basic variable loan without offset. Some lenders bundle offset accounts into a package that includes features like fee waivers and rate discounts, with an annual fee of around $300 to $400.
Redraw facilities are usually included at no extra cost on most variable and fixed rate loans. If you're not keeping a substantial balance in an offset account, the cost of the feature can outweigh the benefit. For example, if your offset account rate is 0.20% higher and you have a $400,000 loan, you're paying an extra $800 per year in interest. You'd need to keep at least $15,000 to $20,000 in the offset on average to break even at current variable rates, depending on your specific rate.
Fixed Rate Loans and Offset Availability
Most fixed rate home loans do not offer offset accounts. If a lender does offer offset with a fixed rate, the offset may only apply to a portion of the loan or the fixed rate itself may be higher than a comparable fixed rate without offset. Redraw is almost always available on fixed rate loans, though some lenders restrict redraw during the fixed period or charge higher fees.
If you're considering a split loan, where part of your loan is fixed and part is variable, the offset account will typically only link to the variable portion. This can still provide value if you're keeping a decent balance in the offset, but it's worth understanding the structure before committing. You can read more about split loan strategies on our home loans page.
Lender Policy and Redraw Restrictions
Some lenders have tightened redraw policies in recent years, particularly for borrowers who enter hardship arrangements or restructure their loans. While rare, there have been cases where lenders have recalculated minimum repayments and reclassified previously available redraw as no longer accessible. This is more common when a borrower has fallen behind on repayments or requested a repayment variation.
Offset accounts are not subject to these restrictions because the funds are held in your own transaction account, not within the loan itself. If certainty of access is important to you, an offset account removes that risk entirely. Borrowers who have experienced income disruption or who work in industries with variable income often prefer offset for this reason.
Which One Suits Your Situation
If you're an investor, an offset account is almost always the right choice to protect tax deductibility. If you're an owner-occupier with a variable rate loan and you regularly keep a decent balance of savings, offset gives you flexibility and access without restriction. If you're on a tight budget and every 0.10% of interest rate counts, a redraw facility may be sufficient, provided you understand the access terms and fees.
Borrowers who plan to pay off their loan faster and won't need to access extra funds regularly can often manage with redraw. Those who want to maintain an emergency buffer or who value unrestricted access should lean toward offset, even if it costs a bit more upfront. There's no single answer that works for everyone, and your circumstances will determine which feature aligns with your goals. If you're refinancing or reviewing your loan structure, it's worth working through your own cash flow and access needs before choosing. You can also read more about refinancing options on our refinancing page or review your current loan setup through a loan health check.
Call one of our team or book an appointment at a time that works for you. We'll walk through your current loan structure, your savings habits, and what you're trying to achieve, and help you choose the features that actually suit your circumstances.
Frequently Asked Questions
What is the main difference between an offset account and a redraw facility?
An offset account is a transaction account linked to your loan where your money stays accessible and reduces the interest charged. A redraw facility lets you make extra repayments that reduce your loan balance, then withdraw those funds later, but the money is held within the loan and may have access restrictions or fees.
Why do investors prefer offset accounts over redraw facilities?
Offset accounts keep the loan balance unchanged, so the full interest remains tax-deductible. If you use redraw and later withdraw funds for personal use, the interest on the redrawn portion is no longer deductible, which can cost thousands in lost deductions over time.
Do offset accounts cost more than redraw facilities?
Loans with offset accounts usually have a higher interest rate or an annual package fee, often 0.10% to 0.30% more per year. Redraw facilities are typically included at no extra cost, so you need to keep a decent balance in the offset to justify the additional expense.
Can I get an offset account with a fixed rate home loan?
Most fixed rate loans do not offer offset accounts, and if they do, the fixed rate may be higher or the offset may only apply to part of the loan. Redraw is almost always available on fixed rate loans, though access may be restricted during the fixed period.
Can a lender restrict access to my redraw funds?
While uncommon, some lenders can restrict or recalculate redraw availability if you enter hardship or restructure your loan. Offset accounts are not subject to these restrictions because the funds are held in your own transaction account, not within the loan itself.
