Offset Account vs Redraw: What’s the Difference?
They both save you interest, but they are not the same thing, and the difference can matter a lot at tax time. Here is how to use each properly.
6 min readAustralia-wide
Offset and redraw are the two main ways to park spare cash against your home loan and pay less interest. People use the words interchangeably, but they work differently, and if you ever turn your home into an investment property, choosing the wrong one can cost you thousands in lost tax deductions. Here is the plain-English version.
An offset account is a everyday bank account linked to your loan; the balance is subtracted from your loan before interest is calculated. Redraw is money you have already paid onto the loan that you can pull back out. Both cut interest the same way, but an offset keeps your money as savings, while redraw money has legally repaid the loan. For flexibility and tax reasons, an offset is usually the safer choice.
What an offset account is
An offset account is a transaction or savings account linked to your home loan. Whatever sits in it is subtracted from your loan balance before the lender calculates interest. Keep $30,000 in an offset against a $500,000 loan and you are charged interest on $470,000, but the $30,000 is still yours to spend at any moment, exactly like a normal bank account.
Because the money never technically leaves your possession, it stays flexible and stays your savings. That distinction becomes important later.
What redraw is
Redraw applies when you pay extra onto your loan, above the minimum repayment, and the loan lets you take that surplus back later. Pay an extra $30,000 off a $500,000 loan and your balance is genuinely $470,000; the redraw facility simply lets you borrow that $30,000 back if you need it.
It reduces interest exactly like an offset, but the money has legally repaid the loan. Some lenders can also freeze, cap, or reprice redraw at their discretion, which an offset generally avoids.
Offset vs redraw, side by side
| Offset | Redraw | |
|---|---|---|
| Interest saving | Yes | Yes |
| Access to funds | Instant, like a bank account | Usually a transfer, sometimes limits |
| Money stays as savings | Yes | No, it has repaid the loan |
| Lender can restrict access | Rare | Possible |
| Often on fixed loans | Less common | More common |
| May carry a fee | Sometimes a package fee | Sometimes per redraw |
The tax trap for future investors
This is the one that catches people. Say you buy a home, pay it down using redraw, then later move out and rent it out. If you redraw that money for personal use, say a car or a holiday, the interest on the redrawn portion is not tax deductible, because deductibility depends on what the borrowed money is used for.
With an offset, your savings were never applied to the loan, so the loan balance stays high and fully deductible when the property becomes an investment, and you simply move your offset cash elsewhere. If there is any chance your home could become an investment one day, an offset preserves your options.
Tax treatment depends on your circumstances and this is general information, not tax advice. Speak to your accountant before relying on it, especially if an investment move is on the horizon.
Which one should you use
For most owner-occupiers who want maximum flexibility and future tax safety, a loan with a genuine 100 percent offset account is the stronger choice, provided any package fee is outweighed by the interest saved. Redraw is perfectly fine if your loan has no offset, or on a fixed portion, but treat redrawn money as a repayment you are reversing, not as a savings account.
Run your own numbers on the repayment calculator, and if you are weighing this up alongside fixing your rate, read fixed vs variable home loans.
Common questions
Does an offset account save the same interest as redraw?
Yes. Both reduce the balance your interest is calculated on, dollar for dollar. A $20,000 offset balance and a $20,000 redraw available saving are identical in pure interest terms. The differences are about flexibility, lender control, and tax, not the interest maths.
Is an offset account worth the fee?
Often yes, but do the sum. If a loan charges a package or offset fee, compare it to the interest you would save on your typical offset balance. On a modest loan with a small offset balance the fee can outweigh the saving; on a larger loan with meaningful savings parked in offset, it usually pays for itself several times over.
Can I have an offset on a fixed rate loan?
Sometimes, but many fixed loans offer only partial offset or none at all, and cap extra repayments. This is one reason some borrowers use a split loan, keeping a variable portion with a full offset. See our fixed vs variable guide for how that works.
Why do accountants prefer offset over redraw?
Because an offset keeps your spare cash as savings rather than applying it to the loan. If the property later becomes an investment, the loan balance and its interest deductibility are preserved. Redrawing money for personal use can permanently reduce your deductible interest. Always confirm with your own accountant.
Can a lender stop me accessing my redraw?
In some cases yes. Redraw is a facility the lender provides and terms can allow them to reduce, freeze or reprice it, particularly in unusual market conditions. Money in an offset account is generally your own funds and less exposed to that risk.
Want your loan structured the right way?
A licensed broker can set up offset and redraw so they actually work for your plans. Free to you, with a Best Interests Duty.