Offset Account vs Redraw: Real-World Comparison
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These two features both reduce mortgage interest. They sound similar. They’re not. Choosing the wrong one costs you money or tax efficiency.
How Offset Works
An offset is a separate transaction account linked to your mortgage. Money sitting in it offsets the loan balance for interest calculation purposes.
- $500k loan balance, $50k in offset → interest charged on $450k
- Money in offset is yours, fully accessible like a normal account
- Daily interest savings, no tax on offset itself
How Redraw Works
Redraw lets you take back extra repayments you’ve already made to the loan. The extra money sits inside the loan, reducing the daily balance.
- You pay $5,000 above scheduled repayments
- Your loan balance is effectively $5,000 lower
- You can “redraw” that $5,000 later if needed (subject to lender’s policy)
The Key Differences
| Feature | Offset | Redraw |
|---|---|---|
| Interest savings | Yes | Yes |
| Liquidity | Instant via debit card / online | Application required (1–3 days) |
| Minimum amount | None | Often $500–$1,000 minimum |
| Tax implications | Clean | Mixed-use loan risk if converted to investment |
| Account fee | Often $10–15/month | Usually free |
The Tax Trap (Critical for Investors)
If you live in a property and later turn it into an investment:
- Money in offset: When you withdraw it, the loan balance and tax-deductibility are unaffected. Clean.
- Money in redraw: Withdrawing redrawn funds for personal use can taint the loan. Only the original purchase-related portion stays deductible.
For anyone who might rent out their home later, offset is dramatically better.
When Redraw Wins
- You’re certain it’ll stay your primary residence
- You want to avoid the offset account fee
- You’re disciplined enough to keep extra repayments locked in
- Your loan structure simply doesn’t offer offset at competitive rates
When Offset Wins
- You might rent the property in the future
- You want emergency liquidity
- You have substantial savings (the larger the balance, the more interest saved)
- You’re optimizing for flexibility
The Math Most People Miss
On a 6% loan, $30,000 in offset saves $1,800/year in interest. Tax-free.
Compare to keeping that $30,000 in a 5% savings account: $1,500 pre-tax → $975 after-tax (32.5% bracket).
Offset wins by $800+/year on this single decision.
💡 Pro Tip: If your bank charges $15/month for offset, you need at least $3,000 sitting in it to break even at 6% rate. Above that, it’s pure savings.