Offset accounts and redraw facilities are two of the most common mortgage features, and both can help reduce the interest you pay. They work quite differently, though, and understanding the distinction can help you choose a loan structure that suits how you manage your money.
How an Offset Account Works
An offset account is a separate transaction account linked to your home loan. The balance in this account "offsets" your loan balance when interest is calculated, meaning you're only charged interest on the difference. For example, if you have a $500,000 loan and $40,000 sitting in a linked offset account, you'll generally only pay interest as if your loan balance were $460,000.
Because your everyday savings, salary and spare cash can sit in the offset account and still reduce your interest, many people use it as their main transaction account, effectively putting all their savings to work against their mortgage while keeping the money fully accessible.
How a Redraw Facility Works
A redraw facility allows you to make extra repayments directly onto your loan, reducing your loan balance (and the interest charged on it), while giving you the option to "redraw" those extra funds back out later if needed. Unlike an offset account, the extra money isn't sitting separately — it's paid into the loan itself, and access to redraw funds can sometimes be subject to lender conditions, minimum amounts, or processing times.
Comparing the Two
- Accessibility: Offset funds are usually available instantly, like any transaction account; redraw funds may take longer or have conditions attached.
- Flexibility: Offset accounts function like normal everyday accounts; redraw facilities are tied more directly to the loan itself.
- Loan type: Offset accounts are more commonly available on variable-rate loans; fixed-rate loans more often use redraw, sometimes with limits.
- Fees: Loans with an offset feature sometimes carry a higher rate or annual fee compared to a basic loan with redraw.
A simple way to think about it
If you like keeping savings easily accessible day to day while still reducing interest, an offset account may suit your habits better. If you're comfortable putting spare cash straight onto the loan and only occasionally need it back, a redraw facility might be simpler and could come with a lower ongoing fee.
Both Reduce Interest in a Similar Way
Mathematically, both features reduce the balance interest is charged on, which is the same underlying idea behind making extra repayments. The key difference is really about access and flexibility, not which one saves you more interest for the same amount of money set aside.
- An offset account reduces the loan balance interest is calculated on, while keeping funds accessible.
- A redraw facility lets you pay extra into your loan and draw funds back out later, sometimes with conditions.
- Both reduce interest in a similar way; the difference is mostly about flexibility and access.
- Compare fees and features across lenders, as they vary considerably.
Want to see how extra funds sitting against your loan could affect your repayments? Try the Smarter Mortgage Calculator.
This article provides general information only and does not constitute financial, credit, legal or tax advice. Lending criteria, fees and loan conditions vary. Consider speaking with a lender, mortgage broker or appropriately qualified professional before making financial decisions.