Offset Account vs Redraw Facility: What's the Difference?

If you’ve got a home loan, chances are your bank has mentioned an offset account or a redraw facility, maybe both. They can seem similar on the surface (both let you effectively use your savings to reduce interest) but they work quite differently, and picking the right one for your situation can make a real difference over the life of your loan.

What is an Offset Account?

An offset account is a separate transaction account linked to your home loan. The balance sitting in that account “offsets” your loan balance when the bank calculates interest, but the money isn’t actually paid into the loan itself, it just sits alongside it.

Case Example: Steven has a $500,000 home loan and $30,000 sitting in his offset account. The bank only charges him interest on $470,000 ($500,000 minus $30,000), even though his loan balance on paper is still $500,000. He can still spend, transfer or withdraw that $30,000 whenever he likes, it behaves just like a normal everyday account.

Pros of an Offset Account

Full flexibility. You can access the money any time, like a regular bank account, often with a debit card attached.
Preserves tax deductibility on investment loans. Since the money sits in a separate account and never actually reduces the loan balance, it doesn’t complicate the deductibility of the interest if the loan is for an investment property.
You can still use it as your everyday account, salary can be paid straight in and bills paid straight out.

Cons of an Offset Account

Not all loans offer one. Offset accounts are more common on variable rate loans and often come with a package, annual fee or added cost.
You need discipline. Because the money is so accessible, it’s easy to dip into it for everyday spending if you’re not careful.

What is a Redraw Facility?

A redraw facility lets you make extra repayments directly onto your home loan, reducing the loan balance (and the interest charged) straight away, while still giving you the option to “redraw” those extra funds back out later if you need them.

Case Example: Kristine has the same $500,000 loan and puts an extra $30,000 onto it through additional repayments. Her loan balance drops to $470,000 and she pays interest on that lower amount. If she needs some of that $30,000 back later for an emergency, she can request a redraw, though this isn’t always instant and some lenders charge a small fee per redraw.

Pros of a Redraw Facility

Often available at no extra cost, even on basic or lower rate loans that don’t offer an offset.
Simple to understand, extra repayments straight onto the loan, same effect as paying it down faster.

Cons of a Redraw Facility

Less flexible access. Redraws can take a few days to process, and some lenders limit how much or how often you can redraw.
Can complicate tax deductibility. If the loan is for an investment property and you redraw funds for a private purpose (like a holiday or a new car), this can “taint” the loan and affect how much interest you can claim as a deduction. This is a common trap, so it’s worth speaking to an accountant before redrawing on an investment loan.
Some lenders can restrict or remove your redraw facility without much notice, particularly during periods of financial stress in the broader economy.

Who Suits What?

If you want maximum flexibility, plan to use the account for everyday banking, or hold an investment property and want to keep things tax clean, an offset account usually makes more sense.

If you’re on a basic low rate loan without an offset available, don’t need frequent access to your extra repayments, and just want the simplest way to pay your loan down faster, a redraw facility can do the job just fine.

The Bottom Line

Both an offset account and a redraw facility can save you real money on interest, the difference comes down to flexibility, cost and how they interact with tax if you’re using the property as an investment. If you’re not sure which suits your situation, it’s worth running it past your mortgage broker or accountant before you decide.