Once you have a mortgage, spare cash is worth more sitting against the loan than in a savings account. Two features let you do that: an offset account and a redraw facility. They reach a similar result, less interest, by different routes, and the difference is worth understanding before you lean on one.
How an offset works
An offset account is a regular everyday transaction account linked to your home loan. The balance in it is subtracted from your loan when interest is calculated. In formula terms, the interest-bearing balance is the loan balance less the offset balance. The money stays yours, you can spend it whenever you like, and it behaves like a normal bank account. Its benefit arrives as loan interest saved rather than deposit interest earned, and loan interest saved is not taxable income the way savings-account interest is.
How redraw works
Redraw is different. When you pay more than your minimum repayment, those extra payments reduce your loan balance and the interest on it. A redraw facility lets you take some of that extra back out if you need it. So the money has technically been paid onto the loan, and redraw is the door to retrieve it.
Where they differ
For an owner-occupier, both cut your interest. Their rules differ:
- Access. An offset is instant, everyday access. Redraw can come with minimum amounts, processing delays, or limits, and a lender can change or freeze redraw terms.
- Fees. Offset accounts often sit on packaged loans with an annual fee. Redraw is more commonly included at no extra cost. Whether the offset is worth the fee depends on how much you keep in it.
- Discipline. Money in an offset is visibly spendable, which suits some people and tempts others. Extra repayments behind a redraw feel more locked away.
The tax angle, if you ever rent it out
This is the one that catches people, and it only matters if the property might become an investment later. The interest on a loan is generally tax-deductible only to the extent the loan was used to buy the income-producing property. Money sitting in an offset does not change what the loan was for, so it leaves your deductible balance intact. Paying down the loan and later redrawing for personal spending can change the deductible portion, because the redrawn money is treated as a new, separate purpose. If there is any chance you will rent the place out down the track, an offset is usually the cleaner structure. Take this question to an accountant before you restructure anything.
The short version
For most owner-occupiers, either feature saves you real interest, and the better one is the one you will actually use. If you want everyday access and might one day turn the home into an investment, an offset is usually worth a closer look, fee and all. If your aim is to chip away at the loan with spare cash, redraw does the job.