The short answer
Offset: a separate transaction account whose balance is treated as if it were a reduction of your home loan balance for interest calculation. Your money stays accessible like any other transaction account. The loan balance itself doesn't change.
Redraw: extra repayments you make on top of the scheduled minimum sit inside the loan account itself. They reduce the loan balance directly. You can “redraw” them later, but the money is technically inside the loan, not in a separate account.
For day-to-day interest savings on the same dollar amount, both achieve the same outcome. The differences show up in access, fees, and especially tax if you ever convert the property to an investment.
Side-by-side comparison
| Offset account | Redraw facility | |
|---|---|---|
| Where your money sits | Separate transaction account, your name | Inside the loan account itself |
| Access speed | Instant (debit card, internet banking, BPAY) | Online transfer, can take 1–2 business days |
| Lender can refuse access | No, it's your money | Yes, in hardship, default, or via T&Cs |
| Typical fees | $10–$15/mo or package fee ($300–$400/yr) | Usually free, sometimes a per-redraw fee |
| Minimum to access | None | Often $500–$1,000 minimum redraw |
| Tax treatment if rented out | Withdrawals don't reduce deductible interest | Redraws can reduce deductible interest |
| Best for | Active everyday use, future investors | Set-and-forget extra repayments |
The critical tax difference
This is the part most people miss until it's too late. If you ever convert your owner-occupier property to an investment property (move out, rent it out), the interest on the loan becomes tax deductible against the rental income.
With an offset account: you can withdraw money from your offset for personal use (a deposit on a new home, a holiday, anything) without affecting the loan's tax-deductibility. The loan balance is unchanged, and the full interest is still deductible against rent.
With redraw: every dollar you redraw is treated by the ATO as new borrowing. If you redraw $50,000 to use as a deposit on your next home, that $50,000 is now a personal-use loan, and the interest on that portion is no longer deductible. This is called “tainting the loan” and it's a permanent problem, you can't un-redraw.
For anyone who might keep their first property as an investment one day, the offset is the clearly better choice, even at $300/year in package fees.
When redraw is the better pick
- You have no plans to ever convert the property to an investment.
- You want to set extra repayments and forget them, no temptation to spend.
- Your lender charges high fees for offset accounts and you have a small balance.
- You prefer the friction of waiting 1–2 business days to access funds.
When offset is the better pick
- You might rent the property out one day (most first-home buyers).
- You want to keep an emergency fund earning interest savings without losing access.
- You have employment income paid into the same account, so the average balance is high.
- The package fee is offset (pun intended) by the interest savings on the balance you typically hold.
How big are the savings?
On a $600,000 loan at 5.79%, $20,000 sitting in an offset account saves roughly $96 a month, or $1,150 a year in interest. That savings compounds because the unpaid interest doesn't accrue, so over a 30-year loan you also pay it off slightly earlier.
For an offset to be worth its $300/year package fee, you need to maintain an average balance of roughly $5,000–$6,000 at current rates. Most working Australians clear that threshold easily through normal salary cycling.
Multiple offsets, partial offsets, and 100% offsets
Not all offset accounts are equal. Three things to verify with your lender:
- 100% offset: the full balance offsets dollar-for-dollar. Most variable-rate offset accounts are 100%. Some “partial offset” products only offset a percentage, avoid these unless you understand the trade-off.
- Fixed-rate loans and offset: most fixed loans don't offer 100% offset, only partial. Some offer no offset at all. If offset is critical, stay variable or split your loan.
- Multiple offsets: some lenders allow several offset accounts against the same loan (one for emergency fund, one for upcoming bills, etc.). A nice feature but not essential.
What lenders won't volunteer
- The package fee on offset products is usually negotiable. Existing customers asking for retention pricing routinely get the fee waived.
- The interest rate on offset variable products is typically 0.10 to 0.20 pp higher than stripped-down basic variable products. Run the maths on your typical balance vs the rate premium before assuming offset is the right call.
- Redraw can be used in tax-effective ways with careful structuring (separate splits for personal vs future-investment expenses) but it's rarely worth the complexity vs just using offset.
Bottom line
Offset if you might ever turn the property into an investment, or you actively cycle income through the account. Redraw if it's definitely a forever home and you want set-and-forget extra repayments. When in doubt, offset, the optionality alone is usually worth the package fee.
Run your numbers in our home loan repayment calculator with the extra-repayments slider set to your average offset balance, and you'll see the difference in interest paid and time to payoff. When you're ready, tell us your situation and we'll connect you with a broker who knows which lenders price offset best for your scenario.