Offset Accounts vs Redraw Facilities: Which Is Right For You?

Both offset accounts and redraw facilities can save you thousands of dollars in interest and shorten your loan term. However, they work differently, have different implications, and suit different people. Understanding these differences is crucial for making the right choice.

How Offset Accounts Work

The Basic Mechanism

An offset account is a transaction account linked to your home loan. The balance in this account is "offset" against your loan balance when calculating interest.

Example:

• Home loan balance: $500,000
• Offset account balance: $50,000
• Interest calculated on: $450,000

You earn no interest on the offset account, but you pay less interest on your loan—which is typically a better outcome.

Interest Calculation

Interest is usually calculated daily:

• Day 1: Loan $500,000, Offset $50,000, Interest on $450,000
• Day 2: Loan $500,000, Offset $52,000 (payday), Interest on $448,000
• Day 15: Loan $500,000, Offset $40,000 (bills paid), Interest on $460,000

This daily calculation means every dollar you park in offset saves interest from the moment it lands.

Types of Offset Accounts

100% Offset:

• Full balance offsets against loan
• Most effective type
• Standard on most variable rate loans

Partial Offset:

• Only percentage of balance offsets
• Less common now but still exists
• Always confirm you have 100% offset

Multiple Offset Accounts:

• Some lenders allow multiple accounts linked to one loan
• Useful for managing different savings goals
• All balances combine for offset calculation

How Redraw Facilities Work

The Basic Mechanism

A redraw facility lets you make extra repayments on your loan and then "redraw" those funds if needed.

Example:

• Required minimum repayment: $3,000/month
• You pay: $4,000/month
• After 12 months: $12,000 available to redraw

The extra payments reduce your loan balance immediately, saving interest. If you need the money back, you can redraw it.

Access and Restrictions

Common Redraw Conditions:

• Minimum redraw amount (often $500-$1,000)
• Maximum redraw limits
• Processing time (same day to several days)
• Online vs. branch-only access
• Transaction fees (increasingly rare but still exist)

How Interest Is Calculated

With redraw, your loan balance is reduced:

• Original loan: $500,000
• Extra repayments made: $50,000
• Current loan balance: $450,000
• Interest calculated on: $450,000

From an interest-saving perspective, this is identical to offset—while the money stays in redraw.

Key Differences That Matter

Accessibility and Control

Offset Account:

• Functions like a normal bank account
• Instant access to funds
• ATM, EFTPOS, direct debit all available
• No restrictions on withdrawals
• Money is always clearly "yours"

Redraw Facility:

• Access may have restrictions
• May require application to redraw
• Limits on withdrawal amounts
• Some lenders can restrict redraw access
• Technically becomes "bank's money" until redrawn

Legal Ownership of Funds

Offset Account:

• Money remains in your account
• Clearly your asset
• Protected in bankruptcy (up to limits)
• Can't be touched by lender

Redraw Facility:

• Extra repayments become "overpayments"
• Legal position can be ambiguous
• Lender can technically restrict access
• In rare cases, lenders have frozen redraw

Important Note: While redraw restrictions are rare, they have occurred. During COVID-19, some lenders restricted redraw access on interest-only loans. For critical emergency funds, offset is generally safer.

Tax Implications

Investment Property Loans:

This is where the distinction becomes crucial:

Scenario: You have an investment property loan and plan to convert it to your home later.

With Offset:

• Loan balance stays at $500,000
• $100,000 sits in offset
• You sell investment and move in
• Loan remains $500,000 (not deductible for PPOR, but that's expected)
• $100,000 cash available for other investment (debt remains investment-related if refinanced correctly)

With Redraw:

• Original loan: $500,000
• Extra repayments of $100,000 made
• Loan balance now: $400,000
• You redraw $100,000 for personal use
• Redrawn amount is NOW personal debt, not investment debt
• You've contaminated your loan structure

The Rule: Redrawing changes the purpose of that portion of the loan. This can have significant tax implications for investors.

Psychological Differences

Offset Account:

• Savings feel separate from loan
• Easier to spend (good or bad)
• Clear visibility of savings balance
• Normal banking experience

Redraw:

• Savings feel "locked away"
• Friction to access may reduce spending
• Focus on loan balance reduction
• Can help compulsive spenders

Which Is Better For You?

Choose Offset If:

You're an Investor:

• Tax deductibility of interest is crucial
• Future loan restructuring may be needed
• Multiple properties may create complexity
• Seek professional advice for your situation

You Value Flexibility:

• Want instant access to funds
• Use money actively (e.g., business cash flow)
• Like to see savings balance clearly
• Need regular access for expenses

You're Disciplined:

• Won't be tempted to spend just because it's accessible
• Have clear savings goals
• Understand the benefit of parking funds
• Will maintain reasonable offset balance

You're Risk-Averse:

• Want clear legal ownership of savings
• Concerned about lender restrictions
• Value certainty over potential small savings

Choose Redraw If:

You're a Spender:

• Tempted by accessible funds
• Need friction to avoid dipping into savings
• Want to "force" yourself to pay down loan
• Benefit from psychological barriers

You Have a Simple Situation:

• Owner-occupier only (no investment property)
• Don't anticipate needing funds regularly
• Want to focus on debt reduction
• Not concerned about tax complexity

You Want Lower Fees:

• Some basic loans offer redraw but not offset
• No-frills loans can be cheaper overall
• If you won't maintain large offset balance, fee savings may win

Your Offset Balance Would Be Small:

• Offset benefits scale with balance
• If you'd only keep $5,000-10,000, benefit is minimal
• Fee savings might exceed interest savings

Maximizing Your Offset Account

Strategy 1: Park All Available Cash

Route everything through offset:

• Salary paid directly into offset
• Savings held in offset
• Emergency fund in offset
• Short-term savings goals in offset

Only move money out for:

• Paying bills (at last possible moment)
• Long-term investments with higher returns
• Specific savings accounts for goals

Strategy 2: The Salary Sweep

1. Salary deposited into offset
2. Set up automatic bill payments from offset
3. Transfer discretionary spending to separate account weekly
4. Maximum balance sits in offset longest

Strategy 3: Multiple Offset Accounts

If available, use multiple offsets for:

• Emergency fund (always in offset)
• Holiday savings (in offset until needed)
• Large purchase savings (in offset until spent)
• Operating buffer (day-to-day funds)

All balances combine for offset benefit while maintaining mental separation.

The Power of Time

Compound Effect:

$50,000 in offset at 6.5% interest saves:

• Year 1: $3,250
• Year 5: $16,250
• Year 10: $32,500
• Over 30-year loan: $97,500+

Plus loan term reduction: That $50,000 maintained in offset can reduce your loan term by 4-5 years.

Maximizing Redraw

Strategy 1: Aggressive Extra Repayments

If you choose redraw, maximize it:

• Pay fortnightly instead of monthly (adds ~1 extra payment/year)
• Round up repayments
• Direct bonuses and windfalls to loan
• Set up automatic additional payments

Strategy 2: Keep Minimum Accessible Balance

Decide on your minimum redraw balance:

• Emergency fund amount (e.g., $20,000)
• Only redraw if absolutely necessary
• Let rest compound against loan

Strategy 3: Use Redraw for Goals

Make extra payments earmarked for specific goals:

• "This $5,000 is for next year's holiday"
• "This $10,000 is for renovations"
• Track in a spreadsheet what each amount is "for"
• Redraw only for the designated purpose

Can You Have Both?

Yes! Many loans offer both offset AND redraw. This allows:

Offset for:

• Day-to-day operating funds
• Money you might need quickly
• Shorter-term savings

Redraw for:

• True extra repayments you don't want to touch
• "Locked away" savings
• Long-term additional payments

Be Aware:

• Additional fees may apply for offset account
• Ensure you understand how each works
• Don't overcomplicate if you don't need both

Common Mistakes to Avoid

Mistake 1: Paying for Offset You Won't Use

If you can only maintain $5,000 in offset:

• Annual fee for offset: $300
• Interest saved at 6.5%: $325
• Net benefit: $25

Consider whether a no-offset loan with lower rate would be better.

Mistake 2: Not Using Offset You're Paying For

If you have offset but keep money elsewhere:

• Savings account earning 4%
• Offset would save 6.5%
• You're losing 2.5% on that money

Always compare after-tax returns.

Mistake 3: Confusing Offset with Savings

Offset funds are still your money and should be:

• Part of your asset calculations
• Considered in your net worth
• Available for emergencies

Don't feel "poor" because your savings sit in offset.

Mistake 4: Redrawing Carelessly

Every redraw increases your loan:

• You pay interest on redrawn amounts
• Your loan term extends
• Your repayments may increase

Only redraw for genuine needs, not wants.

Getting the Right Feature for Your Loan

Questions to Ask Your Lender

1. Is your offset account 100% offset?
2. Are there monthly fees for offset?
3. What are the redraw conditions and limits?
4. Can I have multiple offset accounts?
5. Is there any scenario where redraw access could be restricted?

When to Get Professional Advice

Seek advice if you:

• Have investment properties
• Are self-employed with variable income
• Have complex tax situations
• Are unsure which option suits you
• Want to optimize your loan structure

The Bottom Line

Both offset and redraw can save you significant money. The best choice depends on your:

• Investor or owner-occupier status
• Spending discipline
• Need for flexibility
• Loan fee structure
• Tax situation

At Ding Financial, we help you choose the right features for your situation and ensure you're using them effectively. Contact us for a personalized assessment of which option—or combination—will benefit you most.