Offset Account vs Redraw Facility 2026: Which Saves More on Your Home Loan

Australians hold billions of dollars in offset accounts and redraw facilities, using both to reduce the interest on their home loans. But despite serving a similar purpose — reducing the loan balance on which interest is calculated — offset accounts and redraw facilities are legally and practically different. Choosing the wrong one for your circumstances can cost you thousands in lost tax deductions, reduce your financial flexibility, or saddle you with unnecessary fees.

If you are searching for “offset account vs redraw facility Australia,” this guide explains exactly how each mechanism works, compares their tax implications for owner-occupied and investment properties, and walks through a worked example showing the dollar difference. By the end, you will know which option suits your situation and what it means for your long-term wealth.

What Is an Offset Account?

An offset account is a transaction account linked to your home loan. The balance in this account is offset against your loan principal for the purpose of calculating interest — but it does not actually pay down the loan.

Here is how it works. If you have a $400,000 home loan at 6.00% interest and $30,000 in your linked 100% offset account, the lender calculates your daily interest on $370,000 (the loan balance minus the offset balance), not on $400,000. Your monthly repayment stays the same, but a larger portion of it goes toward principal rather than interest, because there is less interest to pay. This accelerates your loan repayment without you needing to change your repayment amount.

The key feature of a 100% offset account: every dollar in the account reduces your interest by exactly one dollar’s worth. If the offset balance is $30,000, you pay interest on $30,000 less of your loan — a true dollar-for-dollar offset.

Your money stays fully accessible at all times. You can withdraw it, spend it, or transfer it like any transaction account. The offset balance simply fluctuates, and interest is calculated daily on the net balance.

What Is a Redraw Facility?

A redraw facility lets you withdraw extra repayments you have made above your minimum required monthly payment. The logic is: you pay more than you need to, the extra money permanently reduces your loan principal (and therefore your interest), but you can pull it back out if you need it.

If your minimum monthly repayment on a $400,000 loan is $2,398, and you consistently pay $2,800 per month, the extra $402 per month builds up as an available redraw balance. After a few years, you might have $20,000 in available redraw. You can request to redraw that $20,000, which the lender transfers to your transaction account and adds back to your loan principal.

From a pure interest-saving perspective, a redraw facility works almost identically to an offset account — both reduce the principal on which interest is calculated by the same dollar amount. The critical differences are in ownership, access, and tax treatment.

The Legal Difference: Who Owns the Money?

This is the most important distinction and the one that creates the tax difference.

Offset account: The money is yours. It sits in a deposit account in your name. You have not repaid the loan — you have simply parked your savings in a linked account that reduces the interest calculation. The loan principal remains unchanged.

Redraw facility: The money belongs to the lender. When you make an extra repayment, you are paying down the loan. The lender records that you have made additional payments and may allow you to borrow that money back (redraw it), but legally, you have reduced the loan balance. The redrawn amount is technically a new borrowing.

This legal difference has enormous implications if you ever convert your principal place of residence (PPOR) into an investment property — more on this below.

Worked Example: $400,000 Loan at 6% With $30,000 Savings

Let’s compare how offset and redraw perform on the same loan. We assume a $400,000 P&I loan at 6.00% over 30 years, with $30,000 in either an offset account or redraw facility from day one.

Scenario 1: $30,000 in a 100% Offset Account

Interest is calculated daily on $370,000 (the $400,000 loan minus $30,000 offset). The minimum monthly repayment remains $2,398 (calculated on the full $400,000 loan at 6.00%). Because interest is calculated on $370,000, a larger portion of each $2,398 repayment goes to principal.

The result: the loan is repaid in approximately 25 years and 8 months instead of 30 years. Total interest saved: approximately $64,000. The $30,000 in the offset account remains fully accessible at all times.

Scenario 2: $30,000 Redraw (Extra Repayment Paid Off Loan)

The $30,000 is paid directly into the loan, reducing the outstanding principal to $370,000. The lender recalculates the minimum monthly repayment downward — typically to approximately $2,218 per month — because the principal is now lower. Alternatively, the borrower can keep paying the original $2,398 per month and finish the loan even faster.

If the borrower continues paying $2,398 per month, the repayment timeline and interest saved are identical to the offset scenario: approximately 25 years and 8 months, with approximately $64,000 in interest saved.

If the borrower drops to the recalculated minimum of $2,218, the loan term returns to the original 30 years — the lower repayment cancels out the benefit of having paid down principal early. Total interest saved drops to approximately $36,000.

The key practical difference: in the redraw scenario, accessing the $30,000 requires submitting a redraw request and waiting 1–3 business days for the funds, whereas offset money is available instantly via debit card or transfer.

Tax Implications: PPOR vs Investment Property

This is where the choice between offset and redraw becomes financially material — and where getting it wrong can be very expensive.

Owner-Occupied Property (PPOR)

For your own home, interest is not tax-deductible. Both offset and redraw achieve the same outcome: lower interest costs and a faster loan repayment. The only differentiators are fees (offset accounts often cost more), accessibility, and your future plans for the property.

If there is any chance you will convert your PPOR into an investment property in the future — for example, you buy a first home now but plan to upgrade in 5–7 years and rent out the first property — an offset account is strongly preferred. Here is why.

Investment Property (or PPOR Converting to Investment)

When a property becomes an investment and produces rental income, the loan interest becomes tax-deductible. The amount you can deduct depends on the outstanding loan principal and its purpose.

With an offset account: You move your $30,000 from the offset account to your new PPOR purchase. The original $400,000 loan remains fully in place. Every dollar of interest on that $400,000 becomes tax-deductible. At a 37% marginal tax rate (income $135,000–$190,000 in 2026–27), the annual tax deduction on 6.00% interest is approximately $8,880.

With a redraw facility: When you redraw the $30,000 to help buy your next home, the ATO treats that $30,000 portion of the loan as a new borrowing. The deductibility of that portion is determined by the purpose of the redrawn funds. Since you used the $30,000 for a new PPOR (a non-income-producing purpose), that $30,000 portion of the loan is no longer tax-deductible. Only the remaining $370,000 of the loan generates deductible interest.

The difference: approximately $1,800 per year in reduced tax deductions on the offset scenario ($30,000 × 6.00% = $1,800 gross interest affected, and at 37% marginal tax rate, the after-tax cost of that lost deduction is approximately $666 per year). That might not sound like much, but over 20 years, it compounds to approximately $13,300 in lost deductions — and if the redrawn amount is larger (say $100,000), the gap is proportionally larger.

More importantly, if you have been using a redraw facility for years and have built up a $100,000 redraw balance, redrawing it for a non-investment purpose permanently contaminates $100,000 of your loan’s deductibility. With an offset account, this contamination never happens because you never reduced the principal in the first place.

Fees: Offset Accounts Usually Cost More

100% offset accounts are typically offered as part of a packaged home loan, which comes with an annual fee. At the major banks in 2026, package fees range from $250 to $395 per year. These packages often bundle other features such as a fee-free credit card and no application fees on future lending, which can offset the cost if you use them.

Redraw facilities are generally included at no extra cost on most variable rate home loans, including basic no-frills products. If your savings balance is modest — say $5,000–$15,000 — the $250–$395 annual package fee for an offset account might exceed the interest you save. On a $10,000 offset balance at 6.00%, the interest saved is $600 per year. After a $395 package fee, your net saving is $205. In contrast, a redraw facility gives you the full $600 saving for free.

The break-even point for offset account fees: at 6.00% interest, you need approximately $4,200–$6,600 in your offset account at all times to break even on the annual package fee, depending on the fee amount. If your savings consistently exceed that threshold, the offset account is worth the cost.

When to Choose Offset vs Redraw

Choose a 100% offset account if:

• You plan to convert your current property to an investment property in the future
• You want instant, unrestricted access to your savings (same-day transfers, debit card access)
• Your savings balance is consistently above $6,000–$7,000 (to justify the package fee)
• You value the budgeting simplicity of having your savings in a transaction account you can see and manage

Choose a redraw facility if:

• You will never convert your property to an investment
• Your savings balance is modest (under $6,000) and an offset package fee would erode the benefit
• You prefer the psychological barrier of having your extra savings “locked away” in the loan (redraw is slightly less accessible, which can discourage impulse spending)
• You are on a basic variable rate loan that does not offer offset but does offer free redraw
• The interest rate on a basic loan with redraw is 0.25% or more below the package loan rate with offset

Split Strategy: Use Both

Some borrowers use both mechanisms deliberately. They keep an emergency fund of 3–6 months of living expenses in an offset account and direct any additional surplus into the loan via a redraw facility. The offset money is instantly accessible in a crisis; the redraw money earns the same interest saving but is slightly harder to access, which helps with spending discipline.

A borrower with a $400,000 loan and $50,000 in savings might keep $20,000 in an offset account (emergency fund) and pay $30,000 into the redraw facility. If they later need more than $20,000, they can request a redraw — it just takes a few days.

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Use the Mortgage Repayment calculator to model how an offset balance or extra repayments change your total interest and loan term. Visit /calculators/mortgage-repayment/ and enter your numbers to see the impact.

Disclaimer

Disclaimer: This article provides general estimates only and does not constitute financial, tax, or legal advice. Rates, thresholds, and rules change. Always refer to the ATO, your state revenue office, or a licensed professional for your specific circumstances. Last updated: July 2026.