Redraw vs Offset Accounts Explained: Which One Saves You More?

Home Loans

6 Oct

Deciding between a redraw facility and an offset account feels like a small detail that can make a big difference to how much interest you pay and how easily you can access your money. Both reduce the interest you pay on your mortgage by using spare cash to lower the amount lenders calculate interest on, but they work differently and suit different cash flow habits and goals. As a mortgage broker I can explain the practical differences so you know which one is likely to save you more in your situation, not give tax or financial advice.

What they are and how they work

Offset account: a transaction-style bank account linked to your loan. Money in the offset reduces the loan balance used to calculate interest each day. You can spend from it like a normal account using a card or transfers. That flexibility makes it easy to keep working savings in the offset while still reducing interest.
Redraw facility: a feature of your home loan that lets you withdraw extra repayments you have already made. Those extra repayments reduce your loan balance and the interest charged, but accessing funds is usually less flexible than an offset. Lenders often set minimum redraw amounts, processing times and occasional fees.

Which one typically saves more on interest

If the same amount of money sits unused, both options will generally save a very similar amount of interest because both reduce the effective balance the bank charges interest on. The real difference in savings comes from behaviour and access: if you keep a large balance in an offset every day, you get the full daily interest reduction. If you prefer to make lump-sum extra repayments and not touch them often, redraw gives the benefit of lower interest while keeping those funds in the loan. In practice an offset often delivers bigger ongoing savings for people who use it as their everyday account.

Tax and investment considerations to watch for

For owner occupiers the interest outcome is straightforward. For property investors the picture is more complex: how you move money between personal accounts, offsets and the loan can affect whether interest remains tax deductible. Using redraw funds or offset balances for investment purposes can have different tax consequences depending on timing and purpose. Always check with an accountant before relying on tax outcomes. I can explain how lenders treat redraws and offsets but not provide tax advice.

Practical pros and cons at a glance

Offset pros: instant access like a bank account, simple cash flow management, usually better for day-to-day saving. Cons: some offset accounts have monthly or annual fees.
Redraw pros: encourages discipline by making funds a bit harder to access, sometimes no separate account fees. Cons: withdrawal limits, delays, potential fees and less flexibility especially on fixed rate loans.

When one makes more sense than the other

Choose offset if you want easy access to savings, run household cash through the account, or prefer day-to-day convenience that still reduces interest.
Choose redraw if you want to lock away lump-sum extra repayments to stay disciplined and you do not need instant access. Redraw can suit borrowers who make occasional large extra payments and rarely need them back.

Conclusion

Both redraw and offset reduce the interest you pay and can shave years off a mortgage if used consistently. Which one saves you more depends less on the feature itself and more on how you use it, your cash flow habits and whether tax or investment plans complicate the picture. If you want flexibility and day-to-day savings use an offset. If you want to make extra repayments and keep them out of reach unless necessary use redraw. For tax or investment implications get specialist tax advice, and I can help work through lender rules and product features so you pick the right tool for your loan.