Redraw vs Offset Accounts – what’s the difference?

Home loans often come with two features that look almost identical on the surface: redraw facilities and offset accounts. Both reduce the interest you pay, both shorten the life of your loan, and both appear side-by-side in banking apps. Yet they work in fundamentally different ways.

A redraw facility lets you pay more than the minimum monthly loan repayment, reducing your loan principal. Those extra repayments build up as your available redraw balance, which you can access later. The money becomes part of the loan until you withdraw it, which means it’s slightly harder to access than cash in an everyday account. Redraw usually comes with no additional account fees, and many variable loans include it as a standard feature.

An offset account, by contrast, is a separate transaction account linked to your home loan. Money held in this account doesn’t earn interest; instead, it offsets your loan balance so the bank charges you interest only on the difference. Unlike redraw, offset never changes the loan principal – your money remains your money. It’s simple, flexible, and ideal for people who need fast access to cash, though it often comes paired with package fees or higher-rate loans.

How Each Structure Works – In Plain Terms

Redraw: Paying Extra, Then Taking It Back

A home loan with a redraw facility requires you to pay the minimum monthly repayment set by the bank as happens with any home loan. How redraw differs is what you do above that minimum. Any extra money you pay – whether it’s $20, $200, or a large lump sum – goes straight into reducing your loan principal and becomes available for you to withdraw later. You don’t hold this money in a separate account; it simply reduces your loan temporarily. You can access those extra repayments through redraw, but you can’t pay less than the required monthly minimum, even if you’ve previously paid ahead.

So how much you can redraw? If you pay more than the minimum each month, those additional amounts build up as your available redraw balance. Over time, this becomes the total you can access. Some lenders sometimes place limits or buffers on how much you can take out at once, but the core rule is simple – you can only redraw the money you’ve paid ahead.

Redraw encourages discipline because the extra money you pay into your loan isn’t sitting in a normal bank account that you can access instantly. It’s still available, but it takes a little more time and effort to access than money in a regular cash or savings account. That small bit of friction – even just needing to log into the loan section of the app or waiting for a redraw to clear (anywhere from a few seconds to 1-2 business days) – helps prevent dipping into it for impulse spending.

A loan with a redraw facility usually doesn’t cost any more than a standard, basic home loan with normal interest rates and loan fees. You’re not paying for a special feature like you would with an offset account. Redraw is simply included as part of the loan, so the cost is the same as most ordinary home loans.

Therefore redraw is a common feature on many home loans, but it isn’t universal. Most variable-rate loans include redraw because they allow borrowers to make extra repayments and then access those funds later. However, some loans are structured without redraw – particularly ultra-basic “no-frills” products where the lender strips out features to keep costs low.

Fixed-rate loans are another area where redraw isn’t guaranteed. Some lenders offer it, but usually with limits, caps, or delays. Others block extra repayments altogether during the fixed period, which means redraw simply isn’t possible. Interest-only and certain investment loans may also restrict extra repayments, which naturally restricts access to redraw.

So while redraw is common, it’s not something you can automatically assume every loan will have. Borrowers still need to check whether the loan includes it, how it works, and whether any limits or conditions apply.

Benefits of redraw:

• Automatically lowers interest because your loan balance drops.
• Encourages discipline – money is slightly harder to access.
• Usually has no extra account fees.

Drawbacks of redraw:

• The lender legally controls access. Some banks impose redraw limits or delays.
• If you ever convert your home into an investment property, withdrawn funds can complicate tax deductibility.

Offset Accounts: A Savings Account That Cancels Interest

An offset account is separate from your loan, but linked. Whatever sits in your offset does not earn interest – instead, it reduces the amount of your loan the bank charges interest on. If you owe $500,000 and keep $50,000 in offset, you’re charged interest only on $450,000.

In that sense, both redraw and offset accounts reduce the amount of interest you pay on the home loan. What differs then? Redraw changes the actual loan balance, while offset keeps the loan the same but simply reduces the amount the bank charges interest on.

Benefits of Offset Accounts:

• Full, immediate access to your money anytime.
• Clean tax position: offset balances don’t affect loan deductibility.
• Suits people with fluctuating income, savings habits, or multiple goals.

Drawbacks of Offset Accounts:

• Often higher fees or higher interest rates on loans with offset features.
• Requires discipline – money can drift out of the account too easily.