Offset vs Redraw: What’s the Difference — and Why It Matters More Than You Think

Jaeneen Cunningham
Jan 5
3 min read

Offset Account — photo credit Suntezza / Shutterstock.com

To meaningfully shorten the life of a home loan, you must reduce the balance the bank charges interest on each day. There are two primary tools that allow you to do this: the Offset Account and the Redraw Facility. Mathematically, they achieve the same result. Behaviourally, they are very different.

And that difference matters far more than most borrowers realise. The right choice is not about optimisation on paper — it’s about choosing the structure that best protects you from your own habits while still preserving the flexibility you may need in the future.

How Both Offset and Redraw Work

Both tools reduce interest in the same way:they lower the effective balance your lender uses to calculate interest. Whether your surplus cash sits beside the loan (offset) or inside the loan (redraw), the interest outcome is identical at that moment in time. What differs is how the money feels, how it behaves, and how likely you are to interfere with it.

Offset Accounts: Flexibility with Responsibility

An offset account is a separate transaction account linked to your loan.It acts like a mirror. The bank looks at:

your loan balance
the balance sitting in your offset

…and charges interest only on the difference.

The Benefits

Liquidity and sovereigntyThe money remains yours. It sits in a transaction account in your name and is fully accessible at any time. If an opportunity arises — an unexpected expense, a business idea, or a moment where cash flexibility matters — you can move the money instantly. There is no approval process, no application, and no need to ask the bank for access to your own funds.

The investment pivotThis structure can preserve strategic flexibility later on. If you ever move out of your home and convert it into an investment property, holding surplus cash in an offset means the original loan balance remains intact. By contrast, excess repayments made via redraw permanently reduce the loan balance, which may limit future flexibility.

The Risk

The discipline trap Because offset balances are visible in everyday banking apps, they can feel like available spending money. Seeing $50,000 sitting there can quietly justify a lifestyle upgrade or an impulsive purchase. Each dollar spent from the offset doesn’t just leave the account — it effectively switches interest back on for that amount, often for decades to come. The offset account is powerful.But it assumes discipline.

Redraw Facilities: Structure That Works on Autopilot

With a redraw facility, surplus cash is paid directly into the loan itself.The balance of the debt physically falls.

The Benefits

Out of sight, out of mind Once money is paid into redraw, it disappears from your everyday transaction view. For many people, this invisibility is the strongest defence against impulsive spending.

If you can’t see it, you’re far less likely to use it.

The progress high There is a deep and motivating satisfaction in watching a loan balance fall — from $600,000 to $550,000, then $500,000. The progress feels tangible. Permanent. It reinforces the sense that you are winning.

The friction factor Accessing redraw requires a conscious decision. That extra step creates friction — a psychological speed bump. It can feel like undoing progress, which introduces a healthy pause before spending. For many households, this friction is not a flaw, it's the feature.

Choosing the Right Tool

On paper, the offset account offers maximum flexibility. In practice, the redraw facility often delivers better outcomes. Why? Because the right structure is not the most sophisticated one — it’s the one you are least likely to sabotage. A slightly less flexible structure that you stick with will outperform a theoretically superior one that leaks quietly through behaviour.

Both tools work by the same principle:reducing the daily balance interest is charged on. The difference lies in how well each one supports the way you live.