Offset and redraw accounts explained

Resources · Home loans and saving · 5 min read Advanced

Key points

• An offset account is an everyday or savings account linked to your home loan. Its balance reduces the amount you’re charged interest on.
• A redraw facility lets you take back extra repayments you’ve already made.
• On the same numbers, both save exactly the same interest. The difference is access and flexibility.
• They’re common in Australia, show up on some loans elsewhere, and are rare or missing in many countries.

Where these features exist

An offset account or a redraw facility is a feature some home loans have, in some countries. In Australia they’re everywhere. Some lenders in places like the UK offer offset-style mortgages too. But in many countries you won’t see them much. There, extra money usually either goes into the loan or sits in a separate savings account.

No offset or redraw on your loan? Keep reading anyway. The ideas still explain how extra money and interest work together.

How an offset account works

An offset account is an everyday or savings account tied to your home loan. The money in it earns you no interest. Instead, its balance gets subtracted from your loan balance before interest is worked out.

Say you owe $400,000 and you’ve got $20,000 sitting in a fully linked offset account. You’re charged interest as if you owed $380,000. At 6% a year (0.5% a month), that month’s interest is $1,900.00, not $2,000.00.

Your required repayment stays the same. So the $100 of interest you didn’t pay goes to principal instead (see how a home loan repayment works). The balance drops faster. And because next month’s interest is worked out on that lower balance, the effect builds every month.

Some offset accounts are “partial”, meaning only part of the balance counts. Some loans let you link more than one account.

How a redraw facility works

Redraw works differently. You pay extra money straight into the loan, which lowers the balance. The lender keeps track of how far ahead of schedule you are. That amount is your “available redraw”, and you can take it back out if you need it.

The money is genuinely inside the loan, so it cuts interest just like any extra repayment. Pull it out and the balance goes back up.

A worked example

Here are the assumptions:

• Loan: $400,000 at 6% a year, charged monthly
• Term: 30 years, required repayment $2,398.21 a month
• $20,000 available from day one, left untouched for the whole loan
• The rate never changes

The same maths works in any currency.

Look at that. The interest saved is identical, to the cent.

With the money paid into the loan, it’s cleared after 26 years and 4 months. With the money in an offset account, at that same point the loan balance is lower than the offset balance, so you could clear it using that money.

On the maths alone, $1 in an offset account and $1 sitting as available redraw do the same job. The differences are all practical.

The practical differences between an offset account and redraw

Tax is one thing to think about. In some countries, interest you earn in a regular savings account counts as taxable income. Money in an offset or redraw earns no interest, so it doesn’t create that income. How this plays out depends on where you live.

If you own an investment property, it gets trickier. In some countries, paying money into a loan and then redrawing it can change which interest is tax-deductible. An offset account keeps the money separate. If that’s you, a tax professional can explain the local rules.

Then there’s plain human behaviour. Some people find money in an everyday offset account far too easy to spend. Others like that redraw puts a small barrier in the way. Be honest about which one you are.

And watch the fees. If an offset feature costs more each year than the interest it saves you, it isn’t worth it on the numbers. How much it saves depends on how much you usually keep in there.

Using an offset as a savings and spending hub

Some people pay their whole income into an offset account, then spend from a credit card or another account during the month. The idea is to keep the offset balance as high as possible, for as long as possible.

It can trim your interest a little. It can also go badly wrong. If you don’t clear the card in full every month, card interest swallows any saving very quickly. This one lives or dies on your spending discipline.

Common questions

Is an offset account better than redraw?

On the same numbers they save the same interest. Where they differ is access, cost and how easy the money is to spend. Which matters more depends on you.

Do you earn interest in an offset account?

No. Its balance is subtracted from your loan balance when interest is worked out, so you pay less interest instead.

Are offset accounts available outside Australia?

They’re common in Australia, and some lenders in places like the UK offer offset-style mortgages. In many other countries you won’t see them much.

Try it

Want to see what keeping money against your loan could save? Enter it as a lump sum in the home loan extra repayments calculator. For your other debts, you can find your Freedom Date.

General information only, not financial advice. Your situation is your own.