Offset Account vs Redraw Facility: The Real Numbers (Australia)

Offset accounts and redraw facilities are functionally similar in one important respect — both reduce the interest charged on your home loan — and meaningfully different in several others. The distinction matters more for some borrowers than others, and for investors specifically, it can have direct tax implications that affect the total return on a leveraged property.

This post works through the mechanics of both structures with specific numbers, then examines where the structures diverge in ways that matter for real borrowing decisions.

Disclaimer: This is general educational information about mortgage structures and interest mechanics. It is not personal financial advice or taxation advice. For your own circumstances, consult a licensed mortgage broker or registered tax agent.

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The shared mechanism: reducing the interest base

Both an offset account and a redraw facility achieve interest savings through the same basic mechanism: they reduce the loan balance on which interest is calculated.

How interest is charged on a typical Australian home loan:

Interest accrues daily on the outstanding loan balance. On a $750,000 loan at 6.4% per annum:

• Daily interest rate: 6.4% ÷ 365 = 0.01753%
• Daily interest charge: $750,000 × 0.01753% = $131.51
• Monthly interest (30-day month): ~$3,945

If you hold $80,000 in an offset account, the interest calculation changes to:

• Effective loan balance: $750,000 − $80,000 = $670,000
• Daily interest charge: $670,000 × 0.01753% = $117.45
• Monthly interest (30-day month): ~$3,524

That is $421/month in interest savings, or approximately $5,050/year, from a $80,000 offset balance on a $750,000 loan at 6.4%.

Redraw works identically: if you've made $80,000 in extra repayments and they sit in the loan (the balance is $670,000 rather than $750,000), the daily interest calculation is the same. The dollar figures are identical.

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What an offset account actually is

An offset account is a transaction (or savings) account linked to your mortgage. The balance of that account is offset against the loan principal for interest calculation purposes daily.

Key structural features:

• The money is yours — it sits in a deposit account, not in the loan
• You can deposit and withdraw freely (subject to the account's standard transaction rules)
• It's typically attached to a variable rate loan (fixed rate loans rarely offer full offset)
• The account earns no interest itself — instead, it saves interest equal to the mortgage rate on the offset balance

Why "earns the mortgage rate" matters:

A term deposit in 2026 might pay 4.5–5% gross, subject to income tax. If you're in the 37% marginal tax bracket, the net return is approximately 2.8–3.2%. Your mortgage rate of 6.4% is a guaranteed, tax-free return on every dollar in the offset account. This is the reason offset accounts are compelling for borrowers with meaningful savings.

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What a redraw facility actually is

A redraw facility allows you to access extra repayments you've made on your home loan. If you've paid $80,000 ahead of schedule, that $80,000 is part of your loan balance reduction — the balance shows $670,000 rather than $750,000.

The redraw mechanism lets you withdraw some or all of that $80,000 back, which increases your loan balance accordingly.

Key structural features:

• The money is in your loan — it has reduced the principal balance
• Access is typically available online, but the lender sets the terms
• Most lenders set minimum redraw amounts ($500–$1,000 at major banks)
• Redraw is typically available on variable rate loans; fixed rate loans usually don't allow extra repayments or restrict them to $10,000–$20,000/year
• No fee in most cases (some older products charge per-redraw fees)

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The 30-year interest comparison

To quantify the savings, consider a $750,000 loan at 6.4% over 30 years with a consistent balance maintained in offset or redraw.

Base case (no extra funds):

Monthly repayment: $4,680 Total interest over 30 years: approximately $934,800 Loan paid off: 30 years (360 months)

With $50,000 maintained in offset/redraw:

Balance maintained	Annual interest saving	30-year total saving	Loan paid off
$0	—	—	30.0 years
$25,000	$1,600	$48,000	29.1 years
$50,000	$3,200	$96,000	28.2 years
$80,000	$5,120	$153,600	27.0 years
$120,000	$7,680	$230,400	25.4 years
$200,000	$12,800	$384,000	22.0 years

Savings are approximate — actual figures depend on repayment schedule, timing of deposits, and rate movements.

The "30-year total saving" column assumes a constant maintained balance across the full loan term, which is optimistic. The interest saving in the early years (when the base balance is $750,000) is larger per dollar of offset than in the later years (when the base balance has reduced through repayments). The saving is front-loaded — which makes maintaining the balance in the early years disproportionately valuable.

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Where the structures diverge: the tax question for investors

This is the most significant real-world distinction between offset and redraw, and it is specific to investment property loans.

The ATO's position on redraw:

When you make extra repayments on an investment property loan and then redraw those funds for a private purpose, the ATO's position (confirmed through private rulings and tax practitioner guidance) is that you have effectively re-borrowed money for private use. The interest attributable to that re-borrowed amount is not deductible — even though the loan itself remains secured against an investment property.

Example:

• Investment property loan: $600,000 at 6.4%
• Extra repayments made: $80,000 (balance now $520,000)
• Redraw $80,000 for personal use (holiday, home renovation)
• Loan balance returns to $600,000

Interest on the $80,000 portion — approximately $5,120/year — is no longer tax deductible. The loan is still secured against an investment property, but the borrowed funds were used privately. The ATO follows the purpose of borrowing (as established in cases like Taxation Ruling TR 2000/2), not the security for the loan.

Why offset avoids this problem:

When you withdraw from an offset account, you're not re-borrowing — you're accessing your own savings in your own bank account. The loan balance never changes. The interest charge on the $600,000 remains fully deductible because the loan purpose (investment property) hasn't changed.

Impact in numbers:

For an investor in the 37% marginal tax bracket with $80,000 moved from offset to redraw then withdrawn:

• Lost annual deduction: $5,120
• Lost tax benefit: $5,120 × 37% = $1,894/year

This is $1,894/year permanently lost — not a timing difference. Over the remaining loan term, this is a material amount.

The owner-occupier difference:

If you're borrowing for your own home, interest is not deductible regardless of loan structure. The tax distinction doesn't apply. Owner-occupiers can use either offset or redraw without any deductibility consequences.

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The access-control distinction

Beyond tax, there is a practical risk distinction between offset and redraw that materialised during the COVID-19 period.

Several Australian lenders — most notably NAB and Westpac — reduced or froze access to redraw accounts for some customers in early 2020, citing the need to maintain liquidity and manage arrears risk. Customers who had made substantial extra repayments found their available redraw temporarily restricted.

The legal basis for this: redraw is a feature of the loan contract, and lenders typically reserve the right to vary or suspend product features. An offset account is a deposit account — your money, regulated separately, not subject to the same contractual discretion.

This is not a theoretical concern. It happened. Whether it will happen again is unknown, but the structural difference in who controls access is real.

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The cost difference: packages and fees

Standard variable with redraw (no package):

Most basic variable rate loans include a redraw facility at no additional cost. Headline rates from major banks for standard variable no-frills products in 2026 range approximately 6.0–6.4%.

Package loans with offset:

Offset accounts are typically available on "package" products that carry annual fees:

Lender type	Package fee	Offset available
Big 4 banks	$350–$400/year	100% offset
Mid-tier banks	$250–$350/year	100% offset
Online lenders (ING, UBank, Athena)	$0–$100/year	100% offset on some products
Non-bank lenders	Varies	Some offer offset; check terms

The package fee breakeven analysis:

At a $400/year package fee and 6.4% mortgage rate, you need at least $6,250 in your offset account to cover the fee cost ($400 ÷ 6.4% = $6,250). Below that, you're paying for a feature that saves less than it costs.

In practice, most borrowers using an offset account maintain balances far above $6,250 — salary credit, savings, emergency funds. The fee is rarely the binding constraint.

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Fixed rate loans: why offset is typically unavailable

Fixed rate home loans in Australia generally do not offer a 100% offset account, and most cap extra repayments to $10,000–$20,000 per year.

The reason is structural: when a lender offers a fixed rate, they fund that loan at a matching fixed-rate cost in the wholesale market. If borrowers can make unlimited extra repayments or hold large offset balances, the lender cannot accurately predict their funding requirement — so they restrict both.

This creates an implicit trade-off in the fixed vs variable decision: fixing your rate means losing or limiting access to offset benefits. For a borrower with $100,000 in savings, that cost at 6.4% is approximately $6,400/year in foregone interest savings — a meaningful figure that should be included in any fixed-rate comparison.

For the full fixed vs variable trade-off, fixed vs variable home loan: which suits Australian buyers in 2026? covers the rate-risk and flexibility dimensions in detail.

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Worked example: investor with $80,000 available

Scenario: Investment property loan $650,000, variable at 6.4%, 28 years remaining. Borrower has $80,000 in savings. Marginal tax rate 37%.

Option A — $80,000 in 100% offset account:

• Interest saving: $80,000 × 6.4% = $5,120/year
• Tax position: loan interest remains 100% deductible (loan purpose unchanged)
• Access: immediate, no lender restriction risk
• Package fee: $375/year

Option B — $80,000 in extra repayments (redraw available):

• Interest saving: identical $5,120/year
• Tax position: deductible while funds remain in loan; withdrawing for private use creates a mixed-purpose loan and loses deductibility on the withdrawn portion
• Access: available but lender can restrict; minimum redraw amount applies
• Fee: typically $0 (no package required)

Net annual position:

• Option A after package fee: $5,120 − $375 = $4,745/year in net savings
• Option B: $5,120/year in net savings (assuming funds never withdrawn)

Option B wins by $375/year if the funds are never withdrawn and the tax position is never compromised.

For most investors, the risk that they will at some point need to access those funds for personal reasons — and the irreversible tax consequence if they use redraw rather than offset — makes Option A the more defensible structure, despite the fee.

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Using the home loan calculator to model the numbers

The home loan calculator allows you to compare repayment scenarios for different loan balances. The way to model offset savings: run the calculation for the full loan amount, then run it again for (loan amount minus offset balance). The difference in total interest is your offset saving over the remaining term.

For a precise figure, you'd also need to account for the changing loan balance over time and the rate of offset deposits — but the two-scenario comparison gives a useful approximation.

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What to do next

If you're an owner-occupier: The offset vs redraw question is primarily about access convenience and lender risk. Either structure saves the same interest. If you maintain substantial savings and want zero access risk, an offset account makes sense. If your savings are modest and you'd prefer a no-fee product, redraw on a standard variable is a reasonable choice.

If you're a property investor: The tax treatment of redraw when accessed for personal purposes is the critical factor. Getting this wrong is not a recoverable error — the mixed-purpose loan character is established at the time of withdrawal and persists. Consult a registered tax agent for your specific situation, but structurally, an offset account on an investment property loan is the cleaner choice for investors who hold personal savings.

In both cases: The home loan repayments breakdown post covers how interest charges and repayment structure interact more broadly, which provides useful context for evaluating offset and redraw within your overall loan mechanics.

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About the author

Khushboo Patel holds a Master of Finance from the University of Adelaide. She writes about Australian mortgage analysis, loan structures, and personal finance methodology for MyEasyTools.