Offset account vs redraw
Both tools can lower the interest you pay on a home loan. They work in different ways and each has trade‑offs in access, fees and flexibility. Let’s break it down in plain language and run a simple example.
How an offset account reduces daily interest
An offset account is a transaction account linked to your variable home loan. The balance in the offset is treated as if it has already been paid off the loan for the purpose of interest calculation. Interest is charged on the loan balance minus the offset balance, calculated daily and charged monthly.
Example: Loan balance 500,000. Offset balance 20,000. Interest is charged on 480,000, not 500,000.
You can usually move money in and out freely, use a debit card, and receive salary into the offset. Some lenders charge a package fee for full offset features.
How redraw reduces interest
Redraw is the ability to access extra repayments that you have paid above the required minimum. Those extra amounts directly reduce your loan balance and therefore reduce interest the moment they hit the loan. Access can be slower or limited by minimum redraw amounts, processing cut‑off times or fees.
Example: Required payment 2,800 this month. You pay 3,200. The extra 400 sits in redraw, lowering your principal and interest from day one.
Some fixed loans do not allow unlimited extra repayments or redraw. Check your product guide for limits and fees.
Offset vs redraw at a glance
| Feature | Offset account | Redraw facility |
|---|---|---|
| Interest effect | Offsets balance from principal for daily interest | Extra repayments reduce principal immediately |
| Access to funds | Everyday access like a bank account | Access through redraw request; may have limits |
| Fees | Often package or account fee | Sometimes redraw fees or minimums |
| Discipline | Easy access can tempt spending | Harder access can help you stay on track |
| Fixed rates | Full offset less common on fixed loans | Extra repayments often capped while fixed |
Simple numeric example
Assume a 500,000 loan, 6.25 percent annual rate, 30 year term.
- Offset: Keep 20,000 in offset for the full year. You avoid interest on that amount for every day it sits there.
- Redraw: Make a single 20,000 extra repayment into the loan at the start of the year. Principal falls immediately and every later payment includes a little less interest and a little more principal.
At the end of the first year both approaches will have reduced interest by a similar order of magnitude because the bank is not charging interest on the same 20,000 either way. Differences show up in access, discipline and fees rather than the raw interest math.
Model the scenarios with the Mortgage Repayment Calculator or switch to the Loan Repayment Calculator for extra‑payment schedules.
Tax and access differences
For an owner occupied home loan in Australia, interest is usually not tax deductible. For investment property loans the treatment is different. Moving money in and out of redraw on an investment loan can change the deductible portion. Speak with a professional adviser for your situation. This is general information only.
In the United States, mortgage interest on a primary residence may be deductible for people who itemise deductions, subject to IRS limits. Interest on loans or lines of credit secured against your home is not always deductible if the funds are used for personal expenses rather than property improvements. Home equity lines of credit and offset‑style setups can behave differently depending on how they are structured and used, so check the rules for your lender and state.
Which one should you choose?
- Choose an offset if you want everyday access to cash, plan to park salary and savings, and value flexibility.
- Choose redraw if you prefer a set‑and‑forget approach where extra repayments stay in the loan and are less tempting to spend.
- Some borrowers use both: salary and savings sit in the offset; larger windfalls go in as extra repayments.
This is general information. Consider fees, product rules and your own discipline before choosing.