Offset vs Redraw: Which One Actually Saves You More?
Offset and redraw both cut your interest — but they are not the same, and choosing wrong can cost you tax deductions and access to your own money. Here’s the difference that mat…
These two get used interchangeably, and they shouldn’t be. They achieve a similar thing by very different mechanisms — and the difference between them can cost you your tax deductions, or your access to your own savings at the worst possible moment.
With the cash rate at 4.35%, every dollar you park against your loan is working harder than it has in years. Worth getting this right.
What each one actually is
An offset account is a transaction account linked to your home loan. It’s your money. It sits in your account. The bank simply doesn’t charge you interest on the portion of your loan matched by the balance.
$500,000 loan, $50,000 in offset → you’re charged interest on $450,000.
Redraw is different. When you make extra repayments into the loan, you’ve paid the money to the lender. Redraw is the facility that lets you take some of it back out. The money isn’t yours sitting in an account — it’s already gone into the loan, and you’re asking for it back.
The interest saving is broadly the same. Everything else is not.
The three differences that matter
1. Access
Money in an offset is in a transaction account. You have a card. You can spend it today.
Redraw is at the lender’s discretion. It usually takes a few days, may have minimum amounts, and — critically — lenders can reduce or freeze redraw facilities. This has happened, in Australia, to real borrowers, at exactly the moment they most needed the money. Some lenders have quietly recalculated available redraw and cut it, without much warning.
If it’s your emergency fund, it belongs in an offset.
2. Tax — and this one is expensive to get wrong
This matters enormously if there’s any chance the property ever becomes an investment.
Deductibility of interest is determined by the purpose of the borrowing. Money you take back out of a loan via redraw is treated as new borrowing, and its deductibility depends on what you use it for. Pull $100,000 out of redraw to buy a car, and that portion of the loan is not deductible — even after the property becomes a rental.
Money in an offset account is your own cash. Withdrawing it doesn’t change the loan balance’s purpose at all.
The scenario that catches people: you buy a home, dump savings into redraw to cut interest, then years later move out and rent it out. You pull your savings back out of redraw to fund the deposit on your new home. Your loan balance goes back up — but that redrawn portion was used to buy your own residence, so it isn’t deductible against the rental income. You have just torched a large deduction.
Had that money been in an offset, you’d simply withdraw your own cash, the loan balance would remain fully deductible, and you’d be significantly better off.
If there is any possibility your home becomes an investment property: use an offset. Talk to your accountant, but this is the single most common expensive mistake we see.
3. Cost
Offset accounts usually come with a package fee, often a few hundred dollars a year. Redraw is typically free.
If your offset balance is small — say, under $10,000 — the fee may exceed the interest saved. Redraw is fine for a small buffer. Once you’re holding meaningful savings, the offset wins comfortably.
The quick answer
Choose offset
Choose redraw
Property might become an investment
✅
❌
It’s your emergency fund
✅
❌
You want instant access
✅
❌
Small balance, want to avoid fees
❌
✅
You want to be unable to spend it
❌
✅
That last row is real, by the way. Some people deliberately choose redraw because the friction stops them raiding their savings. Know yourself.
Frequently asked questions
Can I have both? Yes, and many borrowers do — a redraw on extra repayments plus an offset for day-to-day savings.
Does an offset account earn interest? No. It saves you interest instead, at your home loan rate — which, at current rates, is a considerably better after-tax outcome than a savings account, because the saving isn’t taxable income.
Do fixed loans have offsets? Usually not, or only partially. It’s one of the main arguments for a split loan.
Can the bank really take away my redraw? Lenders can reduce or suspend redraw availability in certain circumstances. It’s in your contract. This is not a hypothetical.
Not sure your loan is set up properly? Most aren’t. We’ll review the structure — not just the rate.
Managing Director and Principal Finance Broker at Purpose Finance, helping Australians into homes with honest, plain-English advice.