Offset Account vs Redraw: Which One Should You Use?

People often treat these as the same feature with different names. For interest purposes they are, but the differences show up at exactly the moments that matter: when you need the money urgently, when the lender is under pressure, and when a home becomes an investment property.

The mechanics, briefly

With an offset, you hold a normal transaction account linked to the loan. Interest is charged on the loan balance minus the offset balance. Your salary can go into it, your bills can come out of it, and every dollar sitting there reduces interest for as long as it is there.

With redraw, you make extra repayments into the loan itself. The balance falls, so interest falls. If you need the money back, you request a redraw and the lender returns it, subject to their rules.

Same saving. Different ownership.

Access: the difference you notice in an emergency

Offset money is yours, in your account, available immediately through normal banking. Redraw money has been paid to the lender, and getting it back is a request rather than a withdrawal.

Most of the time that request is granted quickly. But lenders retain discretion, and they have used it. Redraw facilities have been reduced, frozen or subjected to minimum amounts and processing delays — sometimes across whole loan books when institutions came under pressure. Some lenders also reserve the right to reduce available redraw if your circumstances change.

If the money is your emergency buffer, that distinction is the entire point. A buffer you cannot reach on the day you need it is not a buffer.

Tax: where the real money is

This is the part that costs people genuine sums, and it only bites later.

The deductibility of interest in Australia depends on what the borrowed money was used for. Paying money into a loan and redrawing it later is treated as new borrowing, and its purpose is whatever you spend it on.

So consider someone who pays $150,000 into their home loan over several years, then decides to keep the property as a rental and buy a new home. If they redraw that $150,000 for the new house, that portion is borrowing for a private residence — the interest on it is not deductible, even though the debt sits against the rental property. The loan is now mixed-purpose and the accounting is unpleasant.

Had the same money been in an offset, withdrawing it simply increases the rental loan balance back to its original level. That interest remains deductible, because the borrowing was always for the investment property.

What offset costs, and when it is not worth it

Offset accounts usually sit inside a package with an annual fee, or attract a slightly higher rate. That cost is fixed; the benefit scales with your balance.

The break-even is simple arithmetic: if the interest saved by your typical offset balance exceeds the annual fee, it pays. Someone who keeps a healthy buffer and runs their salary through it is comfortably ahead. Someone whose account hovers near zero is paying for a feature they are not using, and a plain low-rate loan with redraw would serve them better.

Work out your own break-even on the offset account calculator, using the balance you realistically keep rather than the one you hope to.

Practical points worth knowing

• Partial offset is not full offset. Some accounts offset only a percentage of the balance. Check which you have.
• Multiple offsets against one loan are offered by some lenders, which suits people who like separate buckets for different goals.
• Fixed loans rarely offer a full offset, which is a genuine cost of fixing for anyone holding savings.
• Redraw is not automatically bad. For a straightforward owner-occupied loan you will never rent out, on a low-rate no-frills product, redraw is perfectly sensible and cheaper.
• Do not park an offset balance in a separate savings account for the interest. After tax, the offset almost always wins, because the interest you avoid is not taxed while interest you earn is.

Common questions