Offset account or redraw: what is the difference, and which one suits you?

The short answer

An offset account is your money sitting beside the loan. It is a transaction account in your name, it behaves like any other everyday account, and its balance is netted off the loan balance when interest is worked out.

Redraw is your money inside the loan. Any repayment you make above the scheduled amount reduces the balance straight away, and redraw is the facility that lets you pull those extra repayments back out.

That one distinction — beside the loan or inside it — produces every other difference between them. Access, control and the tax characterisation for an investor all follow from it.

How each one actually works

The mechanics are worth following, because the language lenders use for the two is nearly interchangeable and the products are not. The path a dollar takes is different from the moment it lands.

1. 1

   The money arrives

   With an offset, your pay lands in the offset account and sits there as ordinary cash. With redraw, the money has to be paid into the loan as an extra repayment before it does anything at all.

2. 2

   Interest is calculated

   Most lenders work out home loan interest daily on the balance owing. An offset balance is subtracted from the loan balance for that calculation, while an extra repayment has already reduced the balance itself.

3. 3

   You need some of it back

   From an offset you spend or transfer it the way you would from any transaction account. From redraw you request the funds back out of the loan, and the lender releases them under its own terms.

4. 4

   The loan responds

   Taking money out of an offset raises the balance interest is charged on, without changing what you owe. Taking money out of redraw increases what you owe again, because the funds are coming back out of the loan.

The effect on your interest bill is broadly similar either way. What differs is that one is a withdrawal from your own account and the other is a request to draw on a loan.

Offset and redraw side by side

The table below sets out where the two part company. It carries no rate and no fee, because both are set by the lender writing your loan and neither could be stated honestly on a page like this one.

No single row settles the question. The one that decides it most often is control, because that is the difference you notice on the day you need the money.

Access, and the discretion a lender keeps over redraw

This is the difference borrowers tend to discover at the worst possible moment. Money in an offset account is yours, held on deposit, and you reach it the way you reach any other account you own.

Money in redraw has been paid into the loan. Getting it back is a request to the lender, and the loan contract governs whether, when and how much comes back out.

On some kinds of lending the question never arises, because there is nothing to redraw. Ask what a facility actually carries rather than assuming it behaves like a standard home loan.

• Some loan types carry no redraw at all — construction, bridging, SMSF and business facilities are commonly written without it
• Many lenders set a minimum redraw amount, and some limit how often you could redraw
• Some lenders release a redraw instantly through online banking and others want the request in writing
• Redraw is commonly restricted or unavailable while a loan is fixed
• Loan terms commonly allow a lender to reduce, suspend or withdraw a redraw facility, and lenders have done so
• The amount available could be reduced if the loan falls into arrears or the lender has concerns about the file
• Redraw generally disappears on refinance, because the loan it sits inside is being paid out

None of that makes redraw a poor feature. It makes it the wrong place to keep money you would need at short notice, which is a narrower point and a more useful one.

Interest you are not charged, rather than interest you earn

There is one more difference between these two features and simply leaving the money in a savings account, and it is easy to miss because it never shows up as a line on a statement. A savings account pays you interest, which is money you have received. An offset balance and a redraw balance pay you nothing at all — they reduce the interest you are charged.

So nothing is credited to you and there is no interest income sitting there to be declared. Money you receive is generally assessable where a charge you avoid is not, and that is a real difference between two ways of holding the same cash.

It is worth understanding because it applies to both features equally, whichever one you end up with. The choice between them still turns on access, on control, and on the investment question below.

The tax question on an investment property

This is where the difference stops being about convenience. For an investment property, how the money is characterised could matter, and the two are characterised differently.

In general terms the shape of it is this. An offset balance is your own savings sitting beside the loan, so moving it does not change what the loan was borrowed for. A redraw takes funds back out of the loan, which is a fresh drawing, and a fresh drawing raises the question of what those funds were then used for.

It is also why the placement of an offset is worth a conversation when you hold more than one loan. An owner with both a home loan and an investment loan has a choice about which debt the offset sits against, and that choice is better put to an accountant before settlement than after it.

The practical version is short. Ask before you use redraw on an investment loan for something unrelated to that property, because the question is far easier to answer in advance than to unpick later.

Which one suits which situation

The honest answer is that it depends on how you hold money, and it is worth ten minutes with your real account balances rather than a rule of thumb. The list below is what that conversation covers.

• Work out what you typically hold across a month, not what you hope to hold
• Compare a loan carrying an offset against a basic loan without one, on your own loan size
• Decide where your emergency money should live before you choose the feature, not afterwards
• If you own an investment property, raise offset and redraw with your accountant early
• If you hold both a home loan and an investment loan, work out which debt the offset should sit against
• Check whether a lender you are considering offers an offset against a fixed portion, if you want both
• Read what the redraw terms actually say, including minimums and whether the facility could be varied

As a rough sorting: a household holding a genuine cash buffer, variable income, or GST and tax money it has to keep until it is due, usually gets more out of an offset. A household with a steady balance and no intention of touching its extra repayments could do just as well with redraw on a cheaper loan.

Plenty of borrowers end up with both, because a full-feature variable loan commonly carries the two and there is no rule against using each for a different job. What matters is knowing which money is where on the day you want it.

How we run that comparison, and what an offset costs against what it saves, is set out at /home-loans-perth/offset-home-loans/. Everything above is subject to lender approval, to the lender's own terms, and to your circumstances at the time you apply.