Offset accounts and redraw facilities compared

An offset account and a redraw facility both reduce the interest charged on a home loan by the same amount for every dollar held in them. The difference lies in where the money sits. Funds in an offset account remain the borrower's own deposit, held in a separate transaction account linked to the loan. Funds in redraw have been paid into the loan itself, and getting them back depends on the terms the lender sets.

That structural difference affects three practical matters: how easily the money can be reached, what the feature costs, and how interest may be treated for tax purposes if the home later becomes an investment property.

How an offset account reduces home loan interest

Moneysmart describes a mortgage offset account as a transaction account linked to a home loan, generally available with variable rate loans. Interest on most home loans is calculated daily, and each day the lender subtracts the offset balance from the loan balance before working out the interest charge. Moneysmart's example (page last updated 28 July 2026) is a $750,000 loan with $50,000 in offset, where interest is charged on $700,000.

The scheduled repayment does not change. Because less of each repayment is absorbed by interest, more goes towards principal, and the loan is repaid sooner.

No interest is paid on the offset balance itself. A Reserve Bank of Australia research paper notes that this is part of the appeal: the saving is equivalent to earning the mortgage rate on the deposit, with no taxable interest income, whereas interest earned in an ordinary savings account is taxable.

How a redraw facility reduces home loan interest

A redraw facility is not an account. It is a loan feature that allows a borrower to withdraw repayments made ahead of the required schedule. Extra repayments reduce the loan balance directly, so interest is charged on a smaller debt from the day the payment is made. The amount available for redraw is, broadly, the gap between the actual balance and the balance the loan would have had under the minimum repayment schedule.

The Reserve Bank has observed that mortgage prepayments through redraw and deposits into an offset account have a similar economic effect: in both cases the household's net housing debt and interest payable fall. The interest arithmetic is therefore the same. What differs is everything around it.

Access to funds and lender discretion over redraw

Money in an offset account is at call. It can be spent by card, transferred or withdrawn in the same way as any transaction account, and the lender has no say over its use.

Redraw is more conditional. According to Moneysmart (page last updated 22 July 2026), some lenders limit how much can be redrawn or charge a fee, others may delay access to the funds, and how and when the money can be accessed depends on the loan terms. Conditions that loan contracts may contain include:

• a minimum redraw amount, or a cap on the number of free redraws each year;
• processing delays, so that funds are not available on the same day;
• restricted or no redraw on fixed rate loans;
• a redraw limit that reduces over time so the loan is still repaid by the end of its term;
• a general right for the lender to vary or withdraw the facility.

The last point is not theoretical. In 2020 the Australian Financial Complaints Authority activated its significant event response after ME Bank adjusted redraw limits on some older home loan products. AFCA reported that, following customer feedback, the bank agreed to change limits back for customers who asked. Available redraw is a contractual entitlement rather than a deposit, so borrowers who rely on it as an emergency fund may wish to read the redraw clauses closely.

There is also a difference in deposit protection. APRA states that mortgage offset accounts that are separate deposit accounts are covered by the Financial Claims Scheme, which APRA describes as protecting deposits up to $250,000 per account holder per authorised deposit-taking institution, while mortgage accounts with redraw facilities that are not separate deposit accounts are not covered.

Fees and interest rate differences

Redraw is commonly included on variable rate loans, including low cost basic loans, although a fee for each redraw may apply. Offset accounts are more often attached to package or premium loans. Moneysmart notes that some banks charge for offset features through higher interest rates, account fees, or both, and suggests comparing those costs with the interest a borrower realistically expects to save.

When comparing loans, it is useful to check:

• whether the offset is a full (100 per cent) offset or a partial one;
• any annual package fee or monthly account fee;
• whether the interest rate is higher than the same lender's loan without offset;
• redraw fees, minimums and processing times.

The home loan comparison page and the guide to home loan types and features set out the usual fee structures in more detail.

The tax difference if the home may become an investment property

For a home that will always be owner-occupied, interest is not deductible and the tax treatment of offset and redraw is not a consideration. It matters for borrowers who may later move out, keep the property and rent it.

The ATO's guidance on rental interest expenses (last updated 21 May 2026) explains that deductibility depends on what borrowed money is used for, not on which property secures the loan. It states that interest cannot be claimed on the portion of a loan used for private purposes, and that a deduction cannot be claimed for additional payments made to reduce the principal. Where a loan has a redraw facility, the ATO treats redrawn funds according to their use. In the ATO's example, a borrower who redraws $9,500 from a rental property loan to buy household items must apportion the interest, and continue apportioning both interest and principal repayments for the life of the loan.

Applied to a future investor, the principle works as follows:

• Redraw path. Extra repayments permanently reduce the loan principal. If the owner later redraws those funds to help buy a new home to live in, the redrawn amount is used for a private purpose, so the interest on it is generally not deductible even though the loan is secured by what is now a rental property. The loan becomes a mixed purpose loan that requires ongoing apportionment.
• Offset path. Savings held in an offset account never reduce the loan principal. Withdrawing them is a withdrawal of the borrower's own money rather than a new borrowing. The original loan balance remains, and if the property is then rented, interest is charged on the full balance once the offset is emptied.

The ATO page reviewed for this article does not discuss offset accounts directly, so the second point is an application of the general principle rather than a quoted ATO statement. Outcomes depend on individual facts, including how the loan and accounts are set up. A registered tax agent can confirm the treatment before a borrower relies on it. Further background is available in the investment property section.

Offset account and redraw facility comparison table

Aspect	Offset account	Redraw facility
Where the money sits	Separate deposit account linked to the loan	Inside the loan, as repayments made in advance
Effect on interest	Balance is deducted before daily interest is calculated	Loan balance is lower, so daily interest is lower
Effect on loan balance	None	Reduced by each extra repayment
Access	At call, by card or transfer	On request, subject to loan terms, possible minimums, delays and fees
Lender discretion	Limited: the funds are the customer's deposit	Terms may allow limits to be reduced or the facility changed
Typical cost	Often a package fee, account fee or higher rate	Often included, sometimes with a fee for each redraw
Fixed rate loans	Frequently unavailable or partial	Frequently restricted
Financial Claims Scheme	Covered where it is a separate deposit account, according to APRA	Not covered, according to APRA
If the home becomes a rental	Loan principal is preserved	Redraws for private use are generally not deductible

Worked example: interest saved with $40,000 in offset or redraw

The following hypothetical figures are illustrative only. They assume a $600,000 principal and interest loan over 30 years at a constant 6.00 per cent a year, with interest calculated monthly for simplicity. The rate is an assumption, not a current market rate.

• The minimum monthly repayment is $3,597, and total interest over 30 years without any extra funds is about $695,000.
• With $40,000 held in a full offset account from the first day, interest is charged on $560,000. First year interest falls from about $35,800 to about $33,330, a saving of roughly $2,470.
• Because repayments stay at $3,597, the additional principal reduction compounds. If the $40,000 is left untouched, the loan can be cleared about 57 months early, and total interest falls to about $526,700, a saving of about $168,300.
• Paying the same $40,000 into the loan and leaving it in redraw, with repayments unchanged, produces the same interest result.

The offset account calculator and the extra repayment calculator can be used to test other balances and rates.

Common mistakes and what to check

• Assuming the offset is linked. An ASIC review of eight banks found that some failed to link or maintain offset accounts correctly, and reported that more than $55 million in compensation was paid between September 2023 and August 2025. ASIC suggests checking the link in online banking or statements, and checking again after refinancing or switching loan products.
• Paying for an offset that holds little. The interest saved needs to exceed the package fee or rate premium.
• Treating redraw as guaranteed cash. Available redraw can fall as the loan amortises, and access rules can change.
• Overlooking fixed rate restrictions. A Reserve Bank article from March 2023 reported that only about 15 per cent of fully fixed loans offered an offset facility at that time. The fixed versus variable calculator can help frame that trade-off.
• Mixing purposes in one loan. Redrawing for private spending from a loan that is, or may become, deductible creates a permanent apportionment task.

Which borrowers each feature tends to suit

An offset account tends to suit borrowers who hold a meaningful cash balance, want everyday access, and may convert the home to an investment property. A redraw facility tends to suit borrowers who want a low cost loan, intend to remain owner-occupiers and value a small barrier between themselves and their savings. Some loans provide both. Borrowers reviewing an existing loan can use the refinancing guide to weigh switching costs, or request a free assessment to discuss loan structures with a licensed professional.