Offset vs redraw: What’s the difference?
An offset account is a transaction account that’s linked to your home loan. It saves you interest by reducing the balance of your home loan that interest is charged on. Redraw is a feature that allows you to withdraw money from your home loan if you have made extra payments.
Both an offset account and a redraw facility help you save money by reducing your home loan balance for the purpose of paying interest.
- With a redraw facility, you save on interest directly because the extra payments you have made (but can still ’redraw’ if you need to) actually reduce your home loan balance.
- An offset account indirectly saves you interest because the lender calculates your home loan interest based on your home loan balance, minus the balance of the linked offset account.
How they work...
Offset vs redraw: Side-by-side comparison
Here’s a quick breakdown of the difference between an offset account and redraw facility based on Money’s analysis of hundreds of home loans.
What is it? | |
Offset | A transaction account linked to your home loan. |
Redraw | A home loan feature that applies to the loan account itself. |
How does it save you money? | |
Offset | Money in your offset account reduces the balance of your home loan that interest is charged on. |
Redraw | It means you can make extra repayments on your home loan but access that money again if you need it. |
Which home loans offer it? | |
Offset | Widely available on variable home loans (but not all) and a much smaller number of fixed-rate loans. |
Redraw | Virtually all variable-rate home loans and some fixed-rate loans (there is also often a limit on extra repayments with a fixed loan). |
Is there a cost? | |
Offset | Some lenders charge an extra home loan fee to access offset or a higher interest rate may apply to the loan. |
Redraw | Online redraws are generally free but there may be a fee for redraws carried out at a branch or using phone banking. |
How can I withdraw/spend money? | |
Offset | Generally the same way you would with any other transaction account (e.g. using a debit card). |
Redraw | Via bank transfer from your home loan account to another bank account (you won’t be able to use a debit card). |
Are there limits on how much interest you can save? | |
Offset | No, if it’s a 100% offset account. But some loans only offer ‘partial offset’. |
Redraw | Usually not on a variable rate home loan, but extra repayments may be limited if available on a fixed loan. |
Are there limits to how much I can withdraw? | |
Offset | No, you can withdraw any funds up to the balance of the account. |
Redraw | Generally not, but some fixed loans have limits on how much extra you can pay and therefore have available to redraw. |
Main advantage | |
Offset | Flexibility to easily use the money in the account as it works like any other transaction or savings account. |
Redraw | You’re actually reducing your debt through the extra repayments while still being able to access that money. |
Main disadvantage | |
Offset | There are sometimes higher interest rates on home loans with an offset account. |
Redraw | Not as easy to access your money. |
| Offset | Redraw | |
|---|---|---|
What is it? | A transaction account linked to your home loan. | A home loan feature that applies to the loan account itself. |
How does it save you money? | Money in your offset account reduces the balance of your home loan that interest is charged on. | It means you can make extra repayments on your home loan but access that money again if you need it. |
Which home loans offer it? | Widely available on variable home loans (but not all) and a much smaller number of fixed-rate loans. | Virtually all variable-rate home loans and some fixed-rate loans (there is also often a limit on extra repayments with a fixed loan). |
Is there a cost? | Some lenders charge an extra home loan fee to access offset or a higher interest rate may apply to the loan. | Online redraws are generally free but there may be a fee for redraws carried out at a branch or using phone banking. |
How can I withdraw/spend money? | Generally the same way you would with any other transaction account (e.g. using a debit card). | Via bank transfer from your home loan account to another bank account (you won’t be able to use a debit card). |
Are there limits on how much interest you can save? | No, if it’s a 100% offset account. But some loans only offer ‘partial offset’. | Usually not on a variable rate home loan, but extra repayments may be limited if available on a fixed loan. |
Are there limits to how much I can withdraw? | No, you can withdraw any funds up to the balance of the account. | Generally not, but some fixed loans have limits on how much extra you can pay and therefore have available to redraw. |
Main advantage | Flexibility to easily use the money in the account as it works like any other transaction or savings account. | You’re actually reducing your debt through the extra repayments while still being able to access that money. |
Main disadvantage | There are sometimes higher interest rates on home loans with an offset account. | Not as easy to access your money. |
Which is better: Offset or redraw?
We asked two experienced mortgage brokers about which kinds of borrowers are better suited to an offset account vs redraw.
“Both features behave in the same way – they reduce your interest costs however they may or may not suit you depending on your financial habits,” explains Money’s home loans expert and mortgage broker Mansour Soltani.
“We typically tell our clients that a redraw facility is good value for an owner-occupier loan. This is because it’s usually free with a home loan account.”
Consider offset for an investment property
Mansour Soltani , Money's home loan expert
"An offset account allows you to withdraw funds for personal use, without it impacting any home loan interest tax deductions. On the other hand, accessing money through redraw may limit your ability to claim tax deductions. Always speak to your accountant or financial advisor to fully understand the tax implications based on your situation."
Mansour Soltani , Money's home loan expert
Mortgage broker Rebecca Jarrett-Dalton of Two Red Shoes says she recommends looking at your existing banking habits before deciding whether an offset account or redraw will be better.
“We ask clients how do you bank, how do you save, what do you do with your money? Then we try and match their good banking habits to a loan that's going to suit them,” she explains.
Rebecca says in her experience, people who use one account for all their banking and have bills and payments automated may prefer the convenience of an offset account.
For people who are happy to manually move their money around, a redraw option might be enough.
“That way, they don't incur the offset account fee, because 90% of loans that have an offset will come with a package fee.”
Look at your savings balance when deciding which is best for you
Rebecca Jarrett-Dalton, mortgage broker
"There's not much point in people taking a loan with offset unless they're going to keep a reasonable amount of cash regularly in that account. The exception is if you get multiple offsets with no extra charge. You may as well go with that option because every little bit helps."
Rebecca Jarrett-Dalton, mortgage broker
