Repayment Examples and Checklists
Offset account vs redraw: what $40,000 really saves on your home loan
How an offset account and a redraw facility reduce home loan interest in Australia, why the saving beats a taxed savings account, and when redraw is risky, with worked examples.
An offset account is a transaction or savings account linked to your home loan: its balance is subtracted from the loan balance before interest is calculated. A redraw facility lets you take back extra repayments you have already made into the loan. Both save interest at your home loan rate. The difference is control and tax: offset money is still your own deposit, you can spend it freely, and it keeps the loan balance intact, which matters for investment loans. Redraw money is part of the loan, and the lender can limit or freeze access to it. On an illustrative $600,000 loan at 6.00%, keeping $40,000 in an offset saves about $2,400 of interest in the first year.
This guide is part of how to calculate home loan repayments. Figures are illustrative.
How the interest saving works
Interest is charged on (loan balance minus offset balance). With $600,000 owing and $40,000 in the offset:
- Interest charged on $560,000 instead of $600,000
- First-year saving: $40,000 x 6.00% = about $2,400
Your repayment stays at $3,597.30, so more of each repayment goes to principal and the loan finishes early.
| Scenario, $600,000 at 6.00% over 30 years | Time to repay | Total interest | Saving |
|---|---|---|---|
| No offset | 30 years | about $695,029 | - |
| $40,000 kept in offset throughout | about 26 years 2 months | about $526,723 | about $168,300 |
| $40,000 to start, growing $500 a month | about 22 years 10 months | about $384,770 | about $310,300 |
These assume the rate stays at 6.00% and you keep the full repayment going.
Why an offset beats a savings account for most borrowers
Interest earned in a savings account is taxable income. Interest saved through an offset is not income, so there is no tax on it.
Illustrative example: a savings account paying 4.50% on $40,000 earns $1,800. At a 30% marginal tax rate plus the 2% Medicare levy, tax is $576, leaving $1,224. The same $40,000 in an offset saves $2,400 at a 6.00% loan rate. To match the offset after tax, the savings account would need to pay about 6.00% / (1 - 0.32) = 8.82%.
Offset vs redraw side by side
| Offset account | Redraw facility | |
|---|---|---|
| Where the money sits | In a separate deposit account | Inside the loan as prepaid principal |
| Interest saved | At the loan rate, on the offset balance | At the loan rate, on the extra repaid |
| Access | Like a normal account, cards and transfers | Request a redraw; minimums or fees may apply |
| Lender can restrict access? | Normal account terms apply | Yes, redraw can be limited or removed under many contracts, for example in hardship |
| Cost | Often needs a package or higher rate | Often free |
| Investment loan tax | Loan balance unchanged, so deductibility usually preserved | Redrawing for private use can mix the loan's purpose and reduce deductible interest |
| Fixed rate loans | Often not available, or partial | Often limited |
Is an offset worth the package fee?
An offset often comes with a package fee or a slightly higher rate. Work out the break-even:
With a $395 annual fee and a 6.00% rate: $395 / 0.06 = about $6,600. If your average offset balance is higher than that, the offset more than pays its fee, before considering any rate difference. If the package also has a higher rate than a basic loan, add that cost: 0.10 points on $600,000 is $600 a year, which needs another $10,000 average balance to cover.
Redraw risks to know
- Changes to access. Many contracts allow the lender to reduce or remove redraw. If you are relying on redraw as an emergency fund, an offset or separate savings is safer.
- Minimum amounts. Some lenders set a minimum redraw, such as $500 or $1,000, or charge a fee per redraw.
- Investment property. If you redraw from an investment loan to pay for a car or holiday, the interest on that part is generally not deductible, and the mixed loan becomes harder to track. Talk to a registered tax agent before redrawing.
- Turning your home into an investment. If you may rent the home out later, money parked in an offset keeps the original loan balance high and deductible after you move out, whereas money paid in and redrawn does not. This is a common and costly structuring mistake.
Practical setup
- Have your salary paid into the offset account.
- Pay bills from the offset or by credit card paid in full each month, so the cash sits in the offset longer.
- Check whether the offset is 100% (full balance offsets) or partial.
- For split loans, link the offset to the variable portion.
- Keep a separate small account for spending if seeing a large offset balance tempts you.
Frequently asked questions
Can I have more than one offset account?
Many lenders allow several offset accounts against one loan, for example one for bills and one for savings. Check the product terms.
Does an offset reduce my minimum repayment?
No. Your repayment usually stays the same; the offset lowers the interest, so more goes to principal.
Can I use an offset with a fixed rate?
Some lenders offer a partial or capped offset on fixed loans; many do not. A split loan with the offset on the variable part is the usual workaround.
Is redraw money counted as savings by a new lender?
When refinancing, available redraw is part of your loan. A new lender may require you to draw it down or will refinance only the balance.
Sources
- ASIC Moneysmart — offset accounts and redraw
- Australian Taxation Office — interest deductions on rental property loans
- Australian Financial Complaints Authority — disputes about redraw and account access
