A redraw facility lets you withdraw extra repayments you have made on your home loan, while an offset account is a separate bank account linked to your loan that reduces interest charged on the outstanding balance. The main difference is ownership and flexibility. Redraw money is legally part of your loan, while offset money remains your savings. The downside of an offset account is higher fees and sometimes higher interest rates. Redraw facilities can have restrictions and access limits.
What is the Difference Between Redraw and an offset account?
The difference between redraw and offset accounts lies in structure and control. Redraw allows you to access extra loan repayments. Offset is a transaction account linked to your loan that reduces interest daily. Redraw money reduces your loan principal directly, while offset savings sit separately but offset the loan balance for interest calculation.
A redraw facility works inside your loan account. If your home loan is $400,000 and you pay an extra $20,000, your loan balance becomes $380,000. You can request that $20,000 back through redraw. However, the bank may set limits or fees.
An offset account functions like a regular savings or transaction account. Suppose your loan is $400,000 and you hold $20,000 in offset. You are charged interest only on $380,000. Your loan balance remains $400,000, but interest is calculated on the net amount.
Quick Comparison Table
| Feature | Redraw Facility | Offset Account |
| Money Location | Inside loan | Separate bank account |
| Interest Calculation | Reduces loan principal | Offsets loan balance daily |
| Access to Funds | May have limits or fees | Full access anytime |
| Tax Flexibility | Can affect deductibility | Generally cleaner for tax planning |
| Best For | Reducing interest long-term | Liquidity and flexibility |
In simple terms, redraw is great for disciplined borrowers. Offset is ideal for those who want savings access without compromising interest savings.
What Is the Downside of an Offset Account?
The main downside of an offset account is cost. Many lenders charge higher package fees or slightly higher interest rates for loans with offset features. If you keep a low balance in the offset account, the benefits may not justify the extra costs.
Offset accounts often come with annual fees ranging from $300 to $500 in Australia or $200 to $400 in similar global markets. Some banks offer partial offset, meaning only a percentage of your balance offsets the loan.
Here are common disadvantages:
- Higher loan interest rate compared to basic loans
- Annual package or account-keeping fees
- Temptation to spend savings easily
- Requires a meaningful balance to see real savings
Example Calculation
| Loan Amount | $500,000 |
| Interest Rate | 6% |
| Offset Balance | $50,000 |
| Interest Charged On | $450,000 |
| Annual Interest Saved | Approx $3,000 |
If your offset balance averages only $5,000, your savings drop significantly. In that case, a basic lower-rate loan without offset may be cheaper overall.
What Are the Disadvantages of a Redraw Facility?
The main disadvantages of a redraw facility include limited access, processing delays, and possible fees. Some lenders require a minimum redraw amount, and funds may not be instantly available. Redraw can also complicate tax deductions for investment properties.
Redraw money is technically part of your loan. If the bank changes policy or freezes redraw access during financial stress, you may not be able to withdraw funds quickly.
Key drawbacks include:
- Minimum redraw amounts such as $500 or $1,000
- Processing delays of 1 to 3 business days
- Possible redraw fees per transaction
- Reduced flexibility compared to offset accounts
- Tax complexity if the loan becomes an investment property
For example, if you redraw funds for personal use and later convert the home into an investment property, interest deductibility may be affected. This makes redraw less tax efficient compared to offset in some scenarios.
What Happens to the Redraw When the Loan Is Paid Off?
When your loan is fully paid off, any unused redraw balance usually disappears because it is part of the loan structure. Once the loan account closes, the redraw facility ends. You cannot access funds after closure unless withdrawn before final repayment.
This is a critical difference between redraw and offset. Offset money remains yours at all times. Redraw money exists only while the loan exists.
Important considerations:
- If you plan to access redraw funds, do so before making the final payment.
- Confirm with your lender how final payout calculations work.
- Some lenders automatically apply redraw funds toward the closing balance.
For instance, if your loan balance is $5,000 and you have $8,000 available redraw, the lender may automatically use the redraw to settle the remaining balance, leaving no excess payout.
Which Is Better: Redraw or Offset for Homeowners?
Offset is generally better for borrowers who want flexibility and emergency access. Redraw is better for disciplined borrowers focused purely on reducing interest and paying off their loan faster. The best choice depends on spending habits, tax strategy, and liquidity needs.
Choose offset if:
- You want instant access to funds
- You may convert property into an investment
- You maintain a high savings balance
Choose redraw if:
- You rarely need access to extra payments
- You want a lower-interest-rate loan
- You prefer structured loan reduction
Many borrowers combine both by using a loan with offset and still making additional repayments.
Key Takeaways
- Redraw reduces the loan principal directly, but has access limits.
- Offset reduces interest while keeping savings accessible.
- Offset accounts may cost more in fees and interest.
- Redraw funds disappear once the loan closes.
- Tax planning often favors offset over redraw.
Frequently Asked Questions
1. Is redraw better than offset?
Redraw is better for lowering interest if you do not need frequent access to funds. Offset is better for flexibility and liquidity.
2. Can a bank refuse a redraw?
Yes. Lenders can impose limits, delays, or temporary restrictions based on policy or financial conditions.
3. Does offset reduce monthly repayments?
Usually no. Offset reduces interest charged but monthly repayments remain the same unless refinanced.
4. Is offset account worth the extra fee?
It is worth it if you maintain a high balance that generates interest savings exceeding annual fees.
5. What happens if I refinance?
Redraw balance is typically absorbed into the loan payout. Offset balance remains your savings and transfers to you.
6. Is redraw taxed?
Redraw itself is not taxed, but it may affect interest deductibility for investment properties.
7. Can I have both redraw and offset?
Yes. Many loan products allow extra repayments with redraw plus a linked offset account.
Conclusion
Understanding the difference between redraw and offset account is crucial before choosing a home loan feature. Redraw helps reduce principal but limits flexibility. Offset keeps your money accessible while reducing interest daily. The downside of an offset account is higher cost, while redraw disadvantages include restricted access and potential tax complexity. Before deciding, calculate savings, review fees, and consider long term goals. The right choice can save thousands of dollars and improve financial security.