Key Takeaways
Two of the most powerful features available on Australian home loans are offset accounts and redraw facilities. Both can save you significant interest and help you pay off your mortgage faster, but they work differently and have distinct advantages depending on your situation.
Understanding the difference, and knowing which to use when, can be worth tens of thousands of dollars over the life of your loan. Yet many borrowers either don’t know the difference or use them incorrectly, particularly when investment properties are involved.
An offset account is a transaction account linked to your home loan. The balance in your offset account is deducted from your outstanding loan balance when calculating interest. You don’t earn interest on the offset account. Instead, you save interest on your loan, which is typically a much better outcome.
For example, if you have a $500,000 home loan and $50,000 in your offset account, interest is only charged on $450,000. At 6.2%, this saves approximately $3,100 per year, and that saving is tax-free because you’re not earning interest income, you’re avoiding interest expense.
The power of offset: $50,000 in an offset on a $500,000 loan at 6.2% saves ~$3,100/year. Over 30 years, this could save over $93,000 in total interest and take almost 4 years off your loan term.
There are two types: 100% offset (every dollar counts, standard with most lenders) and partial offset (only a percentage counts, less common). A 100% offset is almost always the better option.
A redraw facility lets you access any extra repayments you’ve made above your minimum. If your minimum monthly repayment is $2,800 but you’ve been paying $3,500, the extra $700/month builds up as available redraw. After 12 months, you’d have about $8,400 available. This money reduces your loan balance (and interest) while it sits there.
Most lenders offer redraw as a standard feature at no extra cost. Access is usually available online or through an app. Some lenders have minimum redraw amounts (e.g., $500).
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| How it works | Separate account offsets loan | Extra repayments sit inside loan |
| Access to funds | Instant (debit card, transfers) | Usually 1-2 business days |
| Fees | $0-$15/month | Usually free |
| Tax impact (investment) | No impact on deductibility | Can reduce deductible interest |
| Salary crediting | Yes, use as everyday account | No |
| Lender can restrict access | No (your account) | Yes (at lender’s discretion) |
This is where the distinction becomes critically important. For investment property loans, using the wrong facility can cost you thousands in lost tax deductions.
The offset advantage: When you keep money in an offset linked to your investment loan, the loan balance doesn’t change. If your investment loan is $400,000 and you have $50,000 in offset, the full $400,000 remains tax-deductible.
The redraw problem: When you make extra repayments into an investment loan and then redraw for personal use (holiday, car, renovations on your own home), the ATO treats the redrawn amount as a new personal loan. You’ve permanently reduced the tax-deductible portion of your investment loan.
For example, if you make $50,000 in extra repayments on a $400,000 investment loan (reducing it to $350,000) and then redraw $50,000 for personal use, you now have a $400,000 loan but only $350,000 is tax-deductible. This distinction is permanent and cannot be reversed.
Key Rule: For investment properties, always use an offset account, never make extra repayments directly into the loan. Keep the investment loan at maximum deductible balance and park surplus cash in offset.
Real Client Example
An investor from Waurn Ponds made extra repayments into his investment loan for three years, building $38,000 in redraw. He then redrew $25,000 for a family holiday and car repairs. His accountant informed him that $25,000 of his investment loan was no longer tax-deductible because the redrawn funds were used for personal purposes. At his 37% marginal rate, this cost ~$575/year in lost deductions, compounding for the remaining loan life. An offset account would have avoided this entirely.
Use it as your everyday account. Have your salary credited directly into your offset. Every dollar that sits there, even for a few days, reduces your interest. Over a year, having your $6,000 monthly salary land in offset before bills are due can save $200-$400 in interest.
Consolidate your savings. If you have money in savings accounts earning 4-5% (taxed), you may be better off moving it to your offset. The effective return equals your home loan rate (6%+) and is completely tax-free. For someone in the 37% bracket, a 6.2% offset return equals ~9.8% in a taxable savings account.
Park lump sums temporarily. Bonuses, tax refunds, inheritance: park it in your offset immediately, even if you plan to use it later. Every day it sits there saves interest, and you can withdraw anytime with no penalties.
Multiple offset accounts. Some lenders allow multiple offset accounts linked to one loan, useful for budgeting while all balances count toward offsetting your loan.
Choose offset if: you have an investment property (essential for tax), you maintain significant cash balances, you want to use it as an everyday transaction account, you value instant access to funds, or you’re in a higher tax bracket.
Choose redraw if: you have a simple owner-occupied loan, you don’t maintain large cash balances, the offset fee outweighs the benefit at your typical balance, or you want simplicity.
Use both if: your lender offers both at no extra cost. Many borrowers use the offset for everyday banking and short-term savings, while making extra repayments (redrawn if needed) for longer-term savings on owner-occupied loans.
Some lenders charge $10-$15/month for offset. At 6.2% interest, you need an average balance of ~$2,000 to break even on a $10/month fee. If your typical balance is above that, offset is worthwhile. Some lenders include offset in package deals where the rate discount alone covers the fee.
Setting up your offset account correctly from the start ensures you maximise your interest savings and avoid common pitfalls. Here is our recommended approach for getting the most out of your offset:
Step 1: Choose a lender with a fee-free 100% offset. Offset accounts vary. Some lenders charge monthly fees, others offer only partial offset, and a few restrict access or features. We recommend selecting a lender that offers a full 100% offset with no monthly account-keeping fees. Several competitive lenders include offset at no additional cost, even on their lowest rate products.
Step 2: Redirect your salary. Have your employer deposit your salary directly into your offset account. From the moment your pay hits the account until you spend it on bills and living expenses, every dollar is reducing your interest. Even if money only sits there for a few days each pay cycle, the cumulative effect over 30 years is substantial.
Step 3: Consolidate all savings. Move your emergency fund, holiday savings, and any other cash reserves into the offset account. The tax-free return at your home loan rate almost always exceeds what you would earn in a savings account after tax. For someone earning $90,000 with a 6.2% home loan rate, the offset provides an effective pre-tax return of approximately 9.5%, better than almost any savings account on the market.
Step 4: Time your bill payments strategically. If you receive your salary on the 15th and your bills are due on the 28th, that is 13 days of additional offset benefit on your full salary. Some borrowers set up all their bill payments to come out on a single day each month, maximising the number of days their offset balance is at its highest.
Step 5: Use a credit card for daily spending (if disciplined). By using a credit card with up to 55 days interest-free for everyday purchases and paying the balance in full from your offset account each month, you keep your cash in the offset for longer. This strategy only works if you pay the card in full every month. Carrying a balance on a 20% credit card defeats the purpose entirely.
For property investors, the offset account becomes an even more powerful tool when used as part of a broader debt management strategy. Here are some advanced approaches we recommend to our investor clients:
Link offset to your home loan, not your investment loan. If you have both a personal home loan and an investment loan, the offset should be linked to your home loan. Why? Your home loan interest is not tax-deductible, so reducing it provides a pure saving. Your investment loan interest is tax-deductible, so you actually want to maintain a higher balance on it to maximise your deduction. The offset reduces the non-deductible debt first while your investment loan stays at its full tax-deductible amount.
Build savings for your next purchase. Rather than paying down your investment loan, accumulate savings in your offset account. When you are ready to purchase your next investment property, you can withdraw the offset funds for the deposit without affecting the tax deductibility of your existing investment loan. If you had instead paid extra into the investment loan and then redrew for a deposit, you would create a mixed-purpose loan that requires complex apportionment of interest deductions.
Rental income strategy. Have your rental income deposited into your home loan offset account rather than your investment loan. This reduces your non-deductible home loan interest while keeping your investment loan at its maximum deductible balance. Many property managers can arrange for rent to be deposited into any nominated account.
Real Client Example
A couple from Torquay had a $450,000 home loan and a $380,000 investment loan. They were making extra repayments of $800/month into their investment loan, thinking they were doing the right thing. We restructured their loans, setting up a 100% offset on their home loan and switching their investment loan to interest-only. The $800/month extra plus their $2,200/month rental income now flows into the home loan offset. After 18 months, their offset balance reached $54,000, effectively reducing their home loan interest calculation to $396,000. Their investment loan remains fully tax-deductible at $380,000, and they are saving approximately $3,350 per year in interest on their home loan, interest that is not tax-deductible. The total annual benefit including the preserved tax deductions exceeds $5,800 per year.
Does an offset account reduce my minimum repayment?
No, your minimum repayment stays the same. However, because less interest is charged, more of each repayment goes toward principal, effectively accelerating your loan payoff.
Can I have an offset on a fixed rate loan?
Some lenders offer offset on fixed rate loans, but it’s less common and may be limited. Consider a split loan: fix a portion and keep the rest variable with full offset.
Is money in an offset account protected if the bank fails?
Yes, offset accounts are covered by the Australian Government’s Financial Claims Scheme, guaranteeing deposits up to $250,000 per person per ADI.
Can the lender remove my redraw access?
Technically, yes. Extra repayments in redraw have been applied to the loan, so the lender can restrict access in certain circumstances. Some lenders restricted or removed redraw access during the COVID-19 period, while offset funds remained accessible because they sit in the borrower’s own account. This is rare in practice, but it’s an important legal distinction from offset where funds remain in your separate account.
Should I put my emergency fund in my offset?
Absolutely. Your emergency fund earns a taxable rate in a savings account, while your offset provides a tax-free return at your home loan rate. As long as you maintain discipline, offset is the optimal place for emergency savings.
Our experienced brokers compare options across 60+ lenders to find the right solution for your situation.
Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
