Offset Accounts vs Redraw: Everything You Need to Know

An offset account and a redraw facility both help you pay less interest, but they treat your spare cash very differently.

If you are choosing a loan in NSW, or reviewing the one you have, this comes down to one question. Do you want your savings kept separate and fully accessible, or are you happy for extra repayments to sit inside the loan? The answer depends on how you use your money, and on whether the property is your home or an investment.

What Is the Difference Between an Offset Account and Redraw?

An offset account is a separate transaction or savings account linked to your loan, and its balance is subtracted from your loan balance when interest is calculated. Redraw lets you withdraw extra repayments you have already paid into the loan.

With an offset, your money stays in an everyday account. You can spend from it, receive your pay into it and keep your emergency funds there. With redraw, the extra money goes into the loan itself, which lowers the balance straight away. You then ask the lender to release it back to you if you need it.

Both reduce the balance that interest is charged on. The main differences are in access, flexibility and what happens when the property is rented out.

How Does a Linked Offset Account Save Interest?

A linked offset account saves interest because you are only charged interest on the loan balance minus the money sitting in the offset. The saving applies each day the money is there.

As an example, take a loan of $600,000 at the illustrative rate of 6.75% p.a. If $30,000 sits in a 100% offset for the whole year, interest is calculated on $570,000. That is about $2,025 less interest a year than on the full balance, because 6.75% of $30,000 is $2,025. This assumes the loan balance stays at $600,000. If you pull the $30,000 out to pay for a renovation, the saving stops, but the cash was yours the whole time. A partial offset would save less.

The trade-off is cost. Loans with an offset often carry an annual package fee or a slightly higher rate than a basic loan, depending on the lender. If your offset balance is small, those costs can outweigh the interest you save. A home loan comparison should weigh up the fee against your likely balance.

How Does Redraw Work on a Home Loan?

Redraw works by letting you withdraw extra repayments you have made above the minimum. Those extra payments cut the loan balance, so you pay less interest on them straight away.

Most variable rate loans include redraw as a standard feature, often with no extra fee. That makes it attractive if you want a loan with low ongoing costs. Many fixed rate loans also allow extra repayments, but caps often apply, so check the limit before you plan around it.

The risks are worth knowing. Lenders can set minimum redraw amounts, limit how often you can withdraw, or take a few business days to release funds. Some lenders can also reduce or restrict access to redraw in certain circumstances, such as when you fall behind. Redraw is not a transaction account, so you cannot pay bills from it directly.

Offset or Redraw for an Investment Property?

For an investment property, an offset account is often favoured because it keeps the loan balance unchanged while still lowering interest. This matters for tax, though the outcome depends on your own circumstances, so speak with your accountant.

In general, interest is deductible when the loan is used to earn income. If you pay extra into an investment loan and later redraw that money for personal use, the redrawn amount may be treated as a new borrowing for a private purpose. That can make part of the interest non-deductible and complicate your records. An offset account avoids this, because the loan balance and the original purpose of the loan stay the same while you hold your own cash in a separate account.

This is why many investors keep their savings in an offset rather than paying them into the loan. Your accountant can confirm how the rules apply to you. If you are weighing up investment loans, raise this question early, as it affects how the loan is set up.

Example: Two Buyers With the Same Loan and Different Habits

Consider two owner-occupiers, each with a $600,000 loan at the illustrative 6.75% p.a. The first buyer has $30,000 in savings and plans to use some of it for car repairs and a holiday within the year. The second buyer is disciplined and unlikely to dip into the money.

The first buyer chooses a loan with an offset, even though it has an annual fee. The $30,000 sits in the offset, remaining available for spending. The saving is about $2,025 a year only if the full $30,000 stays in a 100% offset for the whole year. Because this buyer expects to spend some of it, the actual saving will be lower, as interest is saved only on the average balance held. A partial offset would save less again, and the annual fee and any rate premium reduce the benefit further. When the car repairs come up, the money is there instantly, with no request to the lender.

The second buyer takes a no-fee variable loan with redraw and pays the $30,000 in as extra repayments. The interest saving is the same on the same balance. The outcome is a lower balance and no package fee, but access depends on the lender's redraw rules. In a scenario like this, the first buyer is paying for convenience. The second is giving up some flexibility to avoid that cost.

Can You Have an Offset Account on a Fixed Rate Loan?

Sometimes, but not always. Many lenders do not offer a full offset on fixed rate loans, or offer only a partial one, so the feature is often tied to variable rate products.

If you want certainty on repayments and flexibility with savings, a split loan can help. One part is fixed and the other is variable with a full offset. The downside is that the fixed portion may carry break costs if you repay it early or refinance, and extra repayment caps usually apply. If your fixed term is ending, the fixed rate expiry page covers your options.

Is Your Current Loan Set Up Properly?

It is worth checking whether your current loan matches how you actually use your money. If you hold a large cash balance outside your loan, you may be missing out on interest savings. If you pay a package fee but keep little in your offset, you may be paying for a feature you barely use.

A loan health check looks at your rate, fees and features side by side. If your loan no longer suits you, refinancing may be an option, though it can involve discharge fees, application costs and a new credit assessment. Use a repayment calculator to test the numbers before you decide.

Call one of our team or book an appointment at a time that works for you, and we will work out whether an offset or redraw suits your loan and your goals.

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