Redraw Facility vs Offset Account: What’s the Difference and Which Is Better?

When it comes to paying off your home loan faster and saving on interest, two common features offered by lenders are redraw facilities and offset accounts.

While both can help reduce the interest paid on your mortgage, they function differently and offer distinct advantages depending on your financial habits and goals. 

In this article, we explore the key differences, pros, and cons. 

What Is a Redraw Facility? 

A redraw facility allows you to make extra repayments on your mortgage and then “redraw” those funds later if needed. The additional repayments directly reduce your loan balance, lowering the amount of interest charged. 

Pros of a Redraw Facility: 

• Interest savings: Extra repayments reduce the principal immediately, resulting in lower interest charged over time. 

• Discipline: Because funds are not as easily accessible as in a transaction account, it encourages better saving habits. 

• Automatic benefit: Extra repayments automatically reduce your loan balance.

  
  

Cons of a Redraw Facility: 

• Limited access: Redrawing funds may take a few days or may have limitations (e.g., minimum redraw amounts or fees). 

• Restricted use: Some lenders place caps or freeze redraw access in certain circumstances (e.g., during financial hardship). 

• No separate account: Funds are tied to the loan rather than being held in a flexible transactional account. 

• Fees: some lenders charge fees to withdraw funds.

Whether you choose a redraw facility, an offset account, or both, the key is to use them strategically.

What Is an Offset Account? 

An offset account is a transaction or savings account linked to your variable rate home loan. The balance in this account is “offset” daily against your home loan balance, and interest is charged only on the net difference. 

For example, if your loan is $500,000 and you have $50,000 in your offset account, you’ll only pay interest on $450,000. 

Pros of an Offset Account: 

• Flexible access: You can deposit or withdraw money anytime, just like a regular bank account. 

• Daily interest savings: Interest is calculated daily, so even short-term balances can reduce interest costs. An offset account can potentially save you more in interest than a redraw facility if wages and other income are deposited in the offset account. Since interest is calculated daily, the surplus funds kept in the offset plus the daily deposits will equate to more interest savings than if the surplus funds were just kept in the redraw. 

• No restrictions on withdrawals: Unlike redraw facilities, where there may be limits on access, offset accounts allow for unrestricted use similar to a normal transaction account. 

• Tax-effective for investors: Especially beneficial if you plan to convert your home into an investment property later, as redraws may affect tax deductibility. 

  
  

Cons of an Offset Account: 

• Discipline required: Easy access may tempt you to spend rather than save. 

• Fees or higher interest rates: Though not necessarily a con, some lenders charge for offset accounts, or offer them only with premium loans. This does not necessarily mean that the loan will be more expensive. Savings depends on how the offset account is used and how it is packaged with other loan and transaction accounts. 

• Not all offset accounts are 100%: Some accounts only offset a portion of your balance, reducing effectiveness. 

Key Differences at a Glance

Feature	Redraw Facility	Offset Account
Accessibility:	Limited or delayed	Instant and flexible
Linked to loan balance:	Yes (extra repayments)	No, but balance offsets loan interest
Transaction features:	No	Yes (like a regular bank account)
Interest calculation:	Reduced loan balance	Net balance offset daily
Ideal for:	Disciplined savers with a buffer	Active users who need access to cash

Which One Is Right for You? 

Choose a Redraw Facility if: 

• You want to pay down your loan aggressively. 

• You prefer a “set and forget” approach. 

• You don’t need regular access to your savings. 

Choose an Offset Account if:

• You want daily flexibility and fast access to funds. 

• You maintain a consistent cash buffer (e.g., salary, savings). 

• You’re planning future tax strategies (especially property investors). 

• You habitually save.

Can You Have Both? 

Yes, some home loans offer both features—letting you benefit from immediate interest savings via extra repayments while also maintaining flexibility with an offset account. However, not all lenders offer both, so check the product details carefully. 

In summary, whether you choose a redraw facility, an offset account, or both, the key is to use them strategically. Both features can help you pay off your loan faster, save on interest, and manage your cash flow effectively.  

Your personal situation and financial goals will guide your choice. It is important to speak with a professional, a qualified mortgage broker, to provide you with the tools and information to make the best choice for your circumstance. 

Generally speaking, if you prioritise immediate interest savings and easy access to funds, an offset account might be the best fit. However, if you prefer a structured approach with potential long-term savings, a redraw facility could serve you well. 

Understanding how they work and matching them to your financial habits can make a significant difference over the life of your loan. Speak to us to determine which is better for your lifestyle and financial habits. 

If you are interested in discussing these options further and how Jor’åki Finance can help, visit this link to get a half hour meeting in my schedule.