Both cut your interest by the same arithmetic. The difference is who controls the money, how fast you can reach it, and — if the property ever becomes an investment — how the tax office sees it. That last one is where the real money is.
How each works
An offset account is a normal transaction account linked to your loan. Interest is charged on the loan balance minus whatever sits in the offset. Keep $30,000 in it against a $500,000 loan and you are charged interest on $470,000. The money stays yours, in your account, spendable today.
Redraw is the extra repayments you have already made, sitting inside the loan. Paying extra reduces the balance and therefore the interest. Redraw is the facility that lets you pull some of it back out again.
Where they differ in practice
- Access. Offset money is in a transaction account — card, transfers, instant. Redraw usually needs a request, can take a day or more, and often has minimum amounts.
- Who can take it away. The one people do not think about. Redraw sits inside the loan, and a lender can reduce or freeze redraw availability. Money in an offset is simply yours.
- Cost. Offset usually comes with a package and an annual fee, sometimes a slightly higher rate. Redraw is normally free. On a small balance the package fee can cost more than the offset saves.
- Fixed loans. Most fixed loans cap extra repayments and rarely offer a full offset. If flexibility matters to you, that is a genuine argument for variable, or a split.
The tax difference that costs real money
General principle only — your accountant applies it to your situation.
Suppose you might turn your current home into a rental later. Money kept in an offset can be withdrawn to buy your next home, and the loan balance on the property you are now renting out stays high. The deductible interest stays high with it.
Take the same money out through redraw and the tax office generally treats it as new borrowing for a private purpose. The deductible portion shrinks accordingly, permanently.
For anyone who might ever rent out the home they are buying, that distinction can be worth far more over time than a package fee. Raise it with your accountant before you choose the loan, not after.
So which one?
If you hold a meaningful cash buffer, or there is any real chance the property becomes an investment, offset usually wins. If your balance is small, you are staying put, and you want the cheapest simplest loan, redraw does the same job for nothing.
The mistake is paying a package fee for an offset you will keep $2,000 in. Run the numbers: annual fee versus interest saved on the balance you realistically hold.
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General information only — it does not take your objectives, financial situation or needs into account, and is not credit assistance or taxation advice. Tax treatment depends on your circumstances; obtain advice from a registered tax agent. Loan features and fees vary between products. Easy Loan Finance is a Credit Representative (CRN 568863) of Beagle Finance Pty Ltd, Australian Credit Licence 383640.
