Offset Account vs Redraw Facility: Which Should You Choose?
Important Note: This article provides general information only and does not constitute financial advice. Lending criteria, rates and requirements can vary between lenders and may change over time. Consider your circumstances and seek professional advice before making financial decisions.
Paying off your home loan faster sounds simple enough, until you realise there’s more than one way to put your spare cash to work. Two popular options are an offset account and a redraw facility and while both can help reduce the interest you pay, they work quite differently.
An offset account keeps your extra money in a separate account linked to your mortgage, while redraw lets you access eligible additional repayments you’ve already made on your home loan. So, which one gives you more flexibility? And which could save you more in the long run?
The answer depends on how you manage your money, how often you need access to your savings and what you plan to do with your property. Let’s break down offset accounts vs redraw facilities, how each works and what to consider before choosing one.
What Is an Offset Account?
An offset account is a bank account linked to an eligible home loan. The balance in the account is taken into consideration when your lender calculates the interest charged on your mortgage.
For example, suppose you have a home loan of $600,000 and $50,000 sitting in a linked offset account. You still owe $600,000 on your mortgage. However, if the account provides a full offset, your lender may calculate interest based on a net balance of $550,000.
Not all offset accounts work in exactly the same way. Some loans may offer a partial offset, meaning only a portion of the account balance is used to offset the loan for interest calculations. Check whether the loan offers a full or partial offset before comparing the potential benefits.
The $50,000 remains in your account rather than being paid directly into the mortgage. This means you can generally continue to use the money for everyday expenses, savings or unexpected costs, subject to the account's terms and conditions.
An offset account can work similarly to an everyday transaction account while potentially reducing the interest charged on a linked home loan. If you regularly keep money in savings, an offset feature may therefore be worth considering when comparing home loan options.
What Is a Redraw Facility?
A redraw facility works differently. Instead of keeping your additional money in a separate account, you make extra repayments towards your home loan. These additional repayments reduce your outstanding loan balance. If your home loan includes a redraw facility, you may then be able to access some of the eligible additional repayments in the future.
For example, imagine your required mortgage repayment is $3,000 per month, but you decide to pay $3,500. The additional $500 goes towards reducing your loan balance. Over time, those extra repayments can build up. Depending on your lender and loan conditions, you may be able to redraw some of that additional amount when you need it.
However, redraw access is not necessarily the same as having money sitting in a normal bank account. Not every additional repayment will necessarily be available for redraw. Some lenders may distinguish between available and unavailable redraw amounts and restrictions can apply to certain loan types or repayment arrangements. Lenders can also impose conditions relating to withdrawal amounts, fees, processing times and availability.
This means you should always check the specific redraw conditions attached to your loan before relying on the facility as an emergency source of funds.
Offset Account vs Redraw Facility: How Are They Different?
Both an offset account and redraw facility can potentially reduce the interest you pay, but they do so in different ways. The main differences come down to where your money is held, how you access it and whether you need to make additional mortgage repayments.
Here's a quick comparison:
Feature | Offset Account | Redraw Facility |
Where the money sits | Separate linked account | Within the home loan |
Can potentially reduce interest | Yes | Yes |
Everyday access | Generally available, subject to account terms | Usually more restricted |
Extra repayments required | No | Yes |
Useful for accessible savings | Often more flexible | Depends on lender conditions |
Potential fees | May involve account or package fees | Depends on the loan |
Best suited to | Borrowers who maintain savings and want flexible access | Borrowers focused on making additional repayments |
Neither feature is automatically the right choice for every borrower. The value of each depends on the loan's overall cost and how you expect to use the feature.
What Does an Offset or Redraw Facility Cost?
An offset or redraw feature can be useful, but it’s important to consider the overall cost of the loan rather than focusing on the feature alone.
An offset account may come with:
Annual package fees
Monthly account fees
A higher interest rate
Other account charges
A redraw facility may have different conditions, including possible withdrawal fees, minimum withdrawal amounts or restrictions on access.
When comparing home loans, consider the interest rate, fees and features together. Also, check whether the additional cost of an offset feature is likely to be outweighed by the interest savings you expect to receive.
For example, paying an additional annual fee for an offset account may not make sense if you rarely keep money in the account. On the other hand, a borrower who consistently maintains a substantial balance may potentially save enough interest to make the feature worthwhile.
The question isn't simply:
‘Does this loan have an offset?’
It’s also:
‘What will this loan cost me, and will I use the feature enough to justify that cost?’
Which Option May Suit Your Circumstances?
There isn't a universal answer when comparing an offset account with redraw. Your average savings balance, spending habits, repayment strategy and future plans can all influence which features may be useful.
You Regularly Maintain Savings
An offset account may be worth considering if you regularly keep a reasonable amount of money available.
For example, someone who consistently keeps $30,000 or $50,000 in an offset may potentially benefit more than someone whose balance rarely exceeds a few hundred dollars.
The average balance you maintain is more useful to consider than a higher balance you only reach occasionally. If your offset balance is generally low, the potential interest savings may not justify paying a higher interest rate or additional fees for the feature.
You Regularly Make Extra Repayments
Redraw may appeal to borrowers who have surplus cash available and want to put additional money towards their mortgage.
Making extra repayments can reduce the outstanding loan balance and the interest charged over time. If the loan includes redraw, you may then be able to access eligible additional repayments if your circumstances change.
However, the conditions around redraw vary between lenders. Check whether additional repayments are eligible for redraw and whether any withdrawal limits, fees or processing times apply.
You Need Frequent Access to Your Money
An offset can provide greater flexibility if you want to keep your savings available for everyday spending or unexpected expenses.
Depending on the product, you may be able to have your salary paid into the account, pay bills from it and use a debit card. This can make an offset useful for managing both savings and regular household expenses while potentially reducing the interest charged on your home loan.
An offset can also provide a place to keep money for upcoming expenses such as:
Annual insurance bills
School expenses
Home improvements
Car repairs
Holidays
Emergency costs
If You're a First Home Buyer
First home buyers may want to keep some savings accessible because costs can continue after purchasing a property. Moving expenses, furniture, appliances, repairs, insurance and unexpected maintenance can all require additional cash.
An offset account can potentially provide flexibility while reducing the interest charged on your mortgage. However, if most of your savings will be used for the deposit and purchasing costs, your average offset balance may be too low for the potential savings to justify additional fees or a higher interest rate.
A redraw facility may be suitable if your main priority is making additional repayments and you don't expect to need frequent access to those funds.
Richmond Residential can help first home buyers compare suitable first home buyer loan options and understand how different loan features may fit their circumstances.
If You're an Investor
Property investors often need to think beyond simply reducing today's interest costs. Loan structure, future borrowing, available equity and tax considerations can all become relevant.
For example, paying extra money directly into a loan and later redrawing it for another purpose can have different implications from keeping savings in an offset account. The purpose of redrawn funds can be relevant to the tax treatment of interest, so investors should understand how their loan is structured before moving money in or out.
If you're building a property portfolio, it can therefore be useful to consider your loan structure as part of your broader property portfolio building strategy.
You can also read Richmond Residential's guide on using home equity to buy another property and building a property portfolio.
Tax treatment can depend on how borrowed funds are used and your individual circumstances. Speak with a qualified tax professional before making decisions based on potential tax outcomes.
Your Future Plans
Think about what you're likely to do with the property and loan over the next few years.
Are you planning to:
Renovate?
Buy an investment property?
Upgrade your home?
Refinance?
Build a property portfolio?
Your plans may influence which loan features are useful. For example, someone expecting to keep a substantial savings balance may place more importance on an offset, while someone focused on making regular additional repayments may place more value on redraw.
If you're considering refinancing, Richmond Residential's guide to refinancing a home loan in Australia explains some of the factors worth reviewing.
The Lender's Rules
Don't assume every offset account or redraw facility works in exactly the same way.
Before choosing a loan, check the specific product's:
Eligibility requirements
Access rules
Fees
Minimum balances
Withdrawal limits
Processing times
Whether the offset is full or partial
Which additional repayments are actually available for redraw
Lender conditions can affect how useful a feature is in practice, so review the terms rather than relying on the feature name alone.
Can You Have Both an Offset and Redraw Facility?
Some home loan products offer both an offset account and a redraw facility. You could use the offset for accessible savings while making additional mortgage repayments that may be available through redraw.
Having both features can provide different ways to manage spare cash, but it doesn't automatically make a loan more suitable. Compare the interest rate, fees and conditions to make sure you're not paying for features you don't need.
How Richmond Residential Can Help
Choosing between an offset account vs redraw facility is about finding a home loan that works with the way you manage your money.
At Richmond Residential, we can help you compare suitable home loan solutions, understand the features available and consider how different loan structures may fit your financial goals.
We can help you look at factors such as:
Interest rates
Loan fees
Offset account costs
Redraw conditions
Repayment flexibility
Your savings habits
Your current mortgage
Your future property plans
Whether you're buying your first home, refinancing an existing mortgage or looking at your next property purchase, understanding the structure of your loan can help you make a more informed decision.
Final Thoughts
The right option between an offset account vs redraw facility depends on how you manage your money, how much you typically keep available and the costs and conditions of the loan.
An offset may provide greater flexibility if you regularly maintain savings and want easy access to your money. Redraw may suit borrowers who focus on making additional mortgage repayments and don't need frequent access to those funds. In both cases, the specific loan terms matter.
Before choosing a home loan, compare the interest rate, fees, access rules and other features alongside your own circumstances.
If you're unsure which option may suit your needs, contact Richmond Residential to discuss your home loan options and the features available.
Frequently Asked Questions
Is an offset account better than a redraw facility?
Not necessarily. An offset account may provide easier access to your savings, while a redraw facility may suit borrowers who regularly make additional mortgage repayments. The suitable option depends on your circumstances and the costs and conditions of the specific loan.
Does money in an offset account reduce my home loan balance?
No. Money held in an offset account generally remains separate from the mortgage. Instead, it can reduce the amount of the loan balance on which interest is calculated, depending on whether the loan offers a full or partial offset.
Does redraw reduce my home loan interest?
Additional repayments can reduce your outstanding mortgage balance, which may reduce the amount of interest charged. The exact outcome depends on your loan and lender.
Can I use an offset account for everyday expenses?
Generally, yes. Many offset accounts operate similarly to transaction accounts, allowing you to receive income and make payments. However, features and conditions vary between lenders.
Can I withdraw money from a redraw facility?
You may be able to withdraw eligible additional repayments through redraw, but access depends on the lender and loan conditions. Fees, minimum withdrawal amounts and processing times may apply.
Is an offset account worth paying extra for?
It depends on how much money you typically keep in the account and the additional cost of the loan. The average balance you maintain can be more useful to consider than an occasional higher balance. If your offset balance is consistently low, the potential interest savings may not justify paying higher fees or a higher interest rate.
Can an offset account help me pay off my mortgage sooner?
Potentially. By reducing the amount of your loan on which interest is calculated, an offset account may reduce the interest you pay. If your regular repayments remain unchanged, this can potentially help more of your repayment go towards reducing the principal over time.
Should investors use an offset account or redraw facility?
There isn't a universal answer. Investors should consider loan structure, future borrowing plans, cash flow and potential tax implications. The way funds are held and later accessed can matter, particularly where money is redrawn and used for a different purpose.
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