Offset vs Redraw: What’s the difference?
When it comes to home loans, lenders love to throw in extra features — but which ones actually work for you? Offset accounts and redraw facilities are two of the most common features on a Variable Rate Home Loan. They both help reduce the interest you pay, but they work in very different ways. Let’s break it down…
What is an Offset Account?
An offset account is like a regular transaction account, but instead of just sitting there, your savings actively reduce the interest you pay on your home loan.
How it works:
Any money sitting in your offset account is deducted from your home loan balance before interest is calculated. Example: If you have a $500,000 loan and $10,000 in your offset, you only pay interest on $490,000.
The more money in your offset account, the less interest you pay!
✅ Benefits of an Offset Account:
Saves on interest—Reduces how much interest you pay over time.
Easy access—spend or transfer your money anytime (like a regular bank account!).
Perfect for everyday use—you can deposit your salary and expenses here, working your money smarter, not harder.
Potential tax benefits for investors—money in an offset account doesn’t affect the tax deductibility of an investment loan (talk to your accountant about this one!). This is also a handy feature if you have intentions to convert your Owner Occupier Home to an Investment property in the future.
❌ Heads Up:
Some lenders charge monthly or annual fees for having an offset account.
The easy access can make it tempting to dip into your savings instead of letting them reduce your interest. Don’t like that? Maybe a redraw facility might work better for you…
Best for:
Anyone who wants to keep access to their savings while reducing home loan interest.
What is a Redraw Facility?
A redraw facility is like a hidden piggy bank inside your home loan. It lets you access any extra repayments you’ve made—kind of like a built-in savings buffer.
How it works:
When you make extra repayments on your home loan, that extra cash reduces your loan balance. If you ever need those funds, you can redraw them back out.
Example: If your minimum repayment is $2,000 per month, but you pay $2,500, that extra $500 builds up in your redraw balance. Kind of like an available limit on a credit card…
Your home loan interest is calculated based on the remaining loan balance after deducting any extra repayments you’ve made. For example, if your home loan is $500,000 and you move $10,000 into your redraw facility, you’ll only be charged interest on $490,000.
✅ Benefits of a Redraw Facility:
Lowers your interest— just like an offset, your extra repayments reduce the loan balance and interest charged each month.
Encourages saving discipline—money in redraw isn’t as easily accessible as an offset account, so you’re less likely to dip into it.
Great for rainy days—unexpected expenses? No worries, you’ve got a financial buffer!
No fees – Most lenders offer redraw facilities at no extra cost. Unlike offset accounts…
❌ Heads Up:
Can affect tax benefits—if you later turn your home into an investment property, redraw might reduce the tax deductibility of your loan. Be sure to tell your broker about your future financial goals and plans…
Best for:
Homeowners who want to pay off their loan faster, while keeping extra repayments tucked away; out of sight, out of mind, right!?
The best choice ultimately depends on your financial habits, discipline and goals. Still unsure? Let’s chat…
Your Broker,
Tara.
