Offset account vs redraw: which saves you more?

Both an offset account and a redraw facility let spare cash reduce the interest you pay on your home loan. They do it in different ways, and the difference matters more than most people expect.

Offset account

An offset is a transaction account linked to your loan. Its balance is subtracted from the loan balance before interest is calculated. With a $500,000 loan and $30,000 in offset, you pay interest on $470,000. Your money stays in your account and you can spend it like any other savings.

Redraw facility

Redraw means paying extra into the loan itself, then taking it back out if you need it. The interest saving is the same as an offset with the same balance, but the money is part of the loan, not a separate account.

The differences that matter

• Access: offset money is in your account. Redraw can have minimums or fees, and the lender can limit or freeze it.
• Tax: if a home later becomes an investment property, redrawing is generally treated as new borrowing for tax purposes, while money kept in offset keeps your options open. Get tax advice for your situation.
• Cost: loans with an offset sometimes carry a higher rate or package fee, so the offset needs a big enough balance to pay its way.
• Discipline: money in redraw is a little harder to spend, which suits some people.