Offset vs Redraw: What's the Difference?
Published 31 May 2026
The short answer
An offset account is a separate everyday transaction account linked to your loan; its balance is subtracted from your loan balance before daily interest is calculated. A redraw facility is the pool of extra repayments you've already made into the loan, which you can later pull back out. Dollar-for-dollar at the same rate they save the same amount of interest: a $50,000 offset balance and $50,000 sitting in redraw both reduce the interest-charged balance by $50,000. Where they part ways is access, flexibility, fees, and tax (especially for investors).
How each one works
Both features exploit the same fact. Lenders calculate home-loan interest daily on your outstanding balance, so lower the balance that's charged interest and you pay less.
- Offset: Money stays in your account. You can spend, withdraw, get paid into it, and move it freely; it behaves like a normal bank account, but every dollar in it is one less dollar of loan accruing interest that day. Moneysmart explains the lender subtracts the offset balance from the loan balance before charging interest each day. You don't earn interest on the cash; you save interest on the loan instead.
- Redraw: Money goes into the loan as extra repayments, reducing the principal directly. To use it again you "redraw" it back out, subject to the lender's rules.
Key practical differences:
| Offset account | Redraw facility | |
|---|---|---|
| Where the money sits | Separate linked account | Inside the loan |
| Access | Instant, like a normal account | Subject to lender rules |
| Lender control | Generally always available | Lender may impose daily limits, minimums, or reduce available redraw |
| Typical cost | Often a package/annual fee or higher rate | Usually free, but less common on fixed loans |
| Investor tax | Withdrawals don't change loan purpose | Each redraw is a new borrowing, so its tax-deductibility depends on what you spend it on |
The tax point matters for investors: with redraw, the ATO treats every withdrawal as a fresh borrowing, so redrawing for personal use can "contaminate" the deductible portion of an investment loan. Offset withdrawals don't change the loan's purpose. This is general information, so confirm with a registered tax agent or the ATO.
Worked example ($600k loan)
Take a $600,000 loan at 6% p.a. over 30 years, paid monthly. The repayment is about $3,597/month, and with no offset or redraw you'd pay roughly $695,000 in total interest over the full term.
Now suppose you keep $50,000 sitting in offset (or, equivalently, $50,000 of extra repayments parked in redraw) for the life of the loan:
| Scenario | Interest charged on | Total interest | Loan cleared |
|---|---|---|---|
| No offset/redraw | $600,000 | ~$695,000 | 30 years |
| $50,000 held constant | $550,000 | ~$493,000 | ~25.3 years |
That's roughly $202,000 less interest and the loan cleared about 4.5 years early, because the interest you don't pay stays in the loan and compounds the payoff. At the same rate the $50,000 saves the same amount whether it's in offset or redraw; the choice comes down to access and tax, not the headline interest figure.
Model this in True Loan
True Loan lets you see both effects directly. For an offset:
- Set Loan amount ($600,000), Interest rate (6%), Term (30 years), Repayment frequency (monthly).
- Enter your sustained balance in the dedicated Offset balance input.
True Loan accrues interest on loan minus offset, so a steady offset clears the loan early, exactly as above. Because redraw saves the same interest dollar-for-dollar, you can model an equivalent "money parked in the loan" position with the Extra repayment ($/month) input. Note that Offset balance and Extra repayment ($/month) are separate inputs that work differently: offset is a constant lump sitting beside the loan, while extra repayments accumulate over time. Want to weigh a lump sum in offset against extra monthly repayments? Use True Loan's side-by-side comparison.
Related reading: How much does an offset account save on a $600k loan? · Offset vs extra repayments: which is better? · How much does a $10k lump sum save on your mortgage?
Common questions and mistakes
Does either reduce my monthly repayment? Usually no. Your scheduled repayment stays the same, and you finish the loan sooner instead. (Some lenders recalculate repayments after redraw; check yours.)
Is the interest saving really identical? At the same rate and same balance, yes. The difference is flexibility, fees and tax, not the maths.
Can the lender touch my redraw? Yes: lenders can set daily/minimum limits and, in some cases, reduce available redraw. Offset cash is generally always at hand.
Does an offset earn interest? No, but the interest you save is effectively tax-free, unlike interest earned in a savings account.
Is offset always better for investors? Many investors prefer offset to avoid the redraw "new borrowing" tax trap, but it depends on your situation, so get tax advice.
Figures here are estimates for the 2025-26 Australian financial year and depend on your rate, balance and lender's rules. This is general information, not financial, credit or tax advice. Check official sources like Moneysmart and the ATO, and consider professional advice for your circumstances.
This guide is general information and estimates only — not financial or credit advice. Figures vary by lender and circumstances; always confirm with official sources.