Offset and redraw save identical interest. The difference is whose money it is, and what the ATO sees

An offset and a redraw cut interest in exactly the same way

Both reduce the balance the lender charges interest on, and interest on most home loans is worked out every night on that night's balance. With an offset, the lender subtracts the offset balance from the loan before calculating the night's interest. With redraw, the extra money you paid in has already made the loan balance smaller. Either way, $50,000 held against a $600,000 loan means interest is charged on $550,000 that night.

What differs is where the money lives. An offset is a separate transaction account linked to the loan, with your salary going in, bills going out and a debit card attached. Redraw is not an account at all: it is the lender's agreement to lend back the repayments you made above the minimum, on the loan's own terms.¹

That one difference, whose money it is, drives everything else in this guide: how you get the money back, what happens to your repayment, whether the balance is covered by the government deposit guarantee, and what the tax office sees on an investment loan. The interest arithmetic is the one thing the two have in common. Whether an offset beats a sharper rate with no offset is the other half of the decision, and it has its own guide.

The same $50,000 saves the same interest: a worked example

Meet Priya, an invented borrower, not a client of ours, with a $600,000 loan over 30 years and $50,000 she can keep against it. At an illustrative 6% a year on a variable rate (one the lender can move) with principal-and-interest repayments (each one pays some interest and some of the amount borrowed), her minimum repayment is $3,597 a month. With $50,000 in an offset she is charged interest on $550,000: $2,750 in the first month instead of $3,000, and about $32,700 in the first year instead of $35,800. Pay the same $50,000 into the loan as an extra repayment, keep the repayment at $3,597, and every one of those figures is identical.

Priya's $50,000, four ways

Scenario	Monthly repayment	Interest in year one	Loan paid off in	Total interest over the loan
Nothing held against the loan	$3,597	$35,800	30 years	$695,000
$50,000 in an offset, repayment unchanged	$3,597	$32,700	about 24 years	$492,900
$50,000 paid into the loan, repayment unchanged	$3,597	$32,700	about 24 years	$492,900
$50,000 paid into the loan, repayment recalculated	$3,298	$32,800	30 years	$637,100

Illustrative arithmetic at 6% a year, variable, principal and interest, monthly compounding, with the $50,000 held flat from day one. Not a rate offered by any lender. Totals rounded to the nearest $100.

Rows two and three of the table are the same row, because a dollar in the offset and a dollar paid into the loan both remove a dollar from the balance being charged. Against row one the saving is about $202,000 of interest and close to 6 years off the loan. The offset version ends when the balance left on the loan equals the $50,000 in the account, and Priya closes it with that money.

The 6% is an assumption, chosen to make the arithmetic concrete. It sits near the Reserve Bank's average rate on new owner-occupier loans for September 2026, which Moneysmart reports as 6.15%.⁸ The Reserve Bank's cash-rate rise announced on 29 September 2026 came after that average, so the live figure is likely higher.⁹ At a higher rate every saving in the table is larger, and the comparison between the rows does not change.

Row four is the trap. Priya paid in the same $50,000, but her lender recalculated the minimum repayment over the remaining term, so her monthly payment fell by about $300 and the loan still runs the full 30 years. The interest saving shrinks from about $202,000 to about $58,000. The lump sum did its job for a month, and the lower repayment handed most of it back, a little every month.

Illustrative figures, used to show how the arithmetic works. Not a rate offered by any lender, and not a rate available to any borrower.

Want this table on your own loan? Send the balance, the repayment and what you could keep against it, and you'll have a personal answer within 24 hours. Ask about your loan →

Extra money shortens the loan. It lowers the repayment only if the lender recalculates

Neither an offset nor an extra repayment changes your minimum repayment by itself; the saving shows up as a loan that ends sooner. The lender set the repayment at the start to clear the full balance over the term, which is what a repayment calculator is working out. Hold money against the loan and more of each unchanged repayment goes to principal, so the balance falls faster and the end date moves forward.

Priya's first year, three ways

Year one	Nothing held against the loan	$50,000 in an offset	$50,000 paid in, repayment recalculated
Monthly repayment	$3,597	$3,597	$3,298
Interest charged in year one	$35,800	$32,700	$32,800
Principal repaid by the repayments	$7,400	$10,500	$6,800
Owing at the end of year one, net	$592,600	$539,500	$543,200

Same assumptions as the table above: 6% a year, $50,000 held from day one. In the offset column the closing balance is the loan less the $50,000 still sitting in the account. Principal repaid counts the regular repayments only, not the lump sum.

With an offset the repayment never moves, because the loan contract has not changed. The offset is a separate account, so there is nothing for the lender to recalculate; ASIC's own description says the same, that an offset does not change the required repayment.⁵ If you want a lower repayment you ask for it, and nothing happens by default.

With extra repayments it depends on the lender. Some keep the contractual repayment where it was after a lump sum; others recalculate the minimum over the remaining term, which is Priya's row four. Both are legitimate, and the second is sometimes exactly what a household wants in a tight year. It just should not happen by accident. Send us the loan contract and we will tell you which way yours works.

Illustrative figures, used to show how the arithmetic works. Not a rate offered by any lender, and not a rate available to any borrower.

Redraw is repaid debt. An offset balance is your deposit

Money paid into a loan has repaid debt, and redraw is the lender's agreement to lend it back; money in an offset never stopped being yours. That is the ownership difference, and it only shows when you want the money. An offset is drawn on like any transaction account. Redraw is requested under the loan contract, which sets the minimum, any fee, the timing, and when the lender can reduce or suspend it.

The deposit guarantee makes the ownership point concrete. The Financial Claims Scheme protects deposits up to $250,000 per account holder per ADI, an authorised deposit-taking institution (one banking licence). The Australian Prudential Regulation Authority's list of covered accounts includes mortgage offset accounts that are separate deposit accounts. Credit balances on loans are on the list of what the scheme does not cover.⁴ The offset balance is protected like a savings account; a redraw balance is not a deposit at all.

Offset and redraw at a glance

	Offset account	Redraw facility
What it is	A separate transaction account linked to the loan	The lender lending back repayments you made above the minimum
Whose money	Yours: a deposit in your name	The lender's: debt you repaid, re-advanced on request
Getting it back	Card, transfer or direct debit, any day	A redraw request on the loan's terms; minimums, fees and timing vary by lender
Government deposit guarantee	Covered to $250,000 per person per ADI (one banking licence), where the offset is a separate deposit account	Not covered: a credit balance on a loan is not a deposit
On a fixed rate	Usually unavailable, with a few lender exceptions	Extra repayments usually capped, and redraw often unavailable until the fixed term ends
Your repayment	Unchanged; the loan ends sooner	Unchanged at some lenders, recalculated lower at others
Investment loan, for tax	The loan is untouched; interest stays deductible	A redraw is new borrowing, tested on its new purpose: deductible if that purpose qualifies, not if it is private
What it costs	Often an account or package fee, or a higher rate on offset loans	Usually free; some lenders charge per redraw

Deposit guarantee: the Financial Claims Scheme, administered by APRA. Fixed-rate and fee lines: lender credit policy as at 23 August 2026, and the loan contract governs. Where a line says it varies, we read your contract.

Lenders can and do change redraw. Between 23 and 27 April 2020 one bank adjusted the redraw facilities on about 21,000 home loans, and the regulator told a parliamentary hearing it had expected the bank to tell customers before any adjustment, and that the matter "could have and should have been handled better".⁶ The reductions averaged $17,500,⁷ and on 8 May 2020 the bank apologised and changed the limits back for any customer who asked; a year later the Banking Code Compliance Committee sanctioned it for how the change was communicated.¹¹ Nobody's money was taken. It had already been used to repay debt, which is the point.

Redraw is new borrowing, and the tax office tests it on what the money is spent on

Interest on a loan is deductible when the borrowed money is used to produce income, and a redraw is a fresh borrowing tested on its own purpose: redraw to buy shares or a second rental and the interest on that amount is deductible; redraw for a holiday or a lounge suite and it is not. The Australian Taxation Office's own example is a landlord who is $9,500 ahead on an investment loan and redraws it for a television and a lounge suite. From that day about 97 cents in every dollar of interest stays deductible and 3 cents is private, and that apportionment applies to every interest charge and every principal repayment for the rest of the loan.

The same rule is the engine of debt recycling. Pay down the home loan, borrow the money back to buy income-producing assets, and non-deductible debt becomes deductible debt. Our debt-recycling guide shows how to do it cleanly, through a separate split (a second loan account under the same mortgage) rather than a redraw inside the home loan.

An offset leaves the loan exactly as it was. The balance does not change, the purpose does not change, and spending the offset money tomorrow is not a borrowing, so there is no new purpose to test. The ATO's guidance on interest expenses says what cannot be claimed is interest on the portion of a loan used for private purposes, and a private redraw creates exactly that portion.² The method for splitting the interest between the two portions comes from Taxation Ruling TR 2000/2.³

The same logic applies to any home you might one day rent out. Every extra repayment into the loan on a future rental permanently shrinks the debt that could be deductible; every dollar in an offset keeps that debt intact for the day the property changes purpose. That is why a first home gets an offset by default when there is any chance it becomes an investment, and why debt recycling relies on the same distinction. The tax treatment is your accountant's call; the loan structure that keeps the option open is ours.

Six things people get wrong about offset and redraw

Most of the mistakes come from treating redraw as a savings account and an offset as an investment, when the first is repaid debt and the second is a cancelled cost. The table puts the common versions beside what actually happens, each with where it comes from.

What people say, and what actually happens

What people say	What actually happens
"An offset pays me interest."	It cancels interest on the loan instead. Nothing is paid to you; the benefit is a smaller interest charge, which is why the saving is not taxed as income.
"I would need a big balance for it to matter."	Interest is worked out nightly, so every dollar counts for every night it is there, including salary on its way to the bills. What has to be checked is whether the loan's fees or a higher rate eat the saving at a low balance.
"Paying extra lowers my repayments."	Not by itself. The repayment stays and the loan ends sooner, unless the lender recalculates the minimum, which quietly hands most of the saving back.
"Redraw is my savings account."	It is debt you have repaid. Access is a feature of the loan contract, and in 2020 one bank cut redraw limits on about 21,000 loans before telling the customers.
"Offset and redraw are the same for tax."	A redraw is a new borrowing, and its interest is deductible only if the new purpose qualifies; spend it privately and that share is lost for the life of the loan. An offset leaves the loan untouched.
"I asked for an offset, so it is working."	ASIC's 2026 review of eight banks found offsets requested but not linked, and links broken by refinancing or product switches; banks paid over $55 million in compensation in two years. Check the link in the app, and again after any change to the loan.

Sources: Moneysmart and ASIC on how offsets work and the 2026 offset review; the ATO on redraw and deductibility; the House Economics Committee hearing of June 2020 on redraw limits.

The last row costs the most, because it is invisible. Repayments stay the same either way, so a missing link can run for years. ASIC's example couple, $750,000 borrowed and $50,000 in an unlinked offset, paid more than $3,000 of extra interest in a year, and would have lost almost $230,000 of savings and 4 extra years on the loan had it never been found.⁵

When people choose an offset, when they choose redraw, and why

Most of the borrowers we place end up with the offset, and the ones who choose redraw do it for one of three reasons: the loan is cheaper without an offset, the rate is fixed, or they want the money harder to reach. The table is how the choice falls in practice, household by household. It is a pattern rather than a rule, and the last column is the reason that decides it.

Who chooses which, and why

The household	What they usually choose	Why
Salary comes in, bills go out, and what is left between them is the savings	Offset	Every dollar cancels interest for every night it sits there, and it is spent by card or transfer without asking the lender for anything.
An emergency fund, or saving for a car, a renovation or a holiday	Offset	The money stays yours and sits under the deposit guarantee. Redraw would mean asking for repaid debt back, on the lender's terms.
A business owner or contractor holding money for tax and GST	Offset	The money has a due date. It cuts interest until then and goes to the ATO on the day, with no redraw minimum or delay in the way.
A first home that might be rented out one day	Offset	Extra repayments permanently shrink the debt that could later be deductible. An offset keeps that debt intact for the day the purpose changes.
An investment loan	Offset, not extra repayments	A redraw is a new borrowing tested on its new purpose, so a private redraw costs a share of the deduction for the life of the loan. An offset leaves the loan untouched.
A disciplined owner-occupier who will not touch the money	Redraw, on the loan with the sharper rate	When the offset costs an annual fee or a higher rate, a small balance can save less than the offset costs. The break-even is in our offset-versus-rate guide.
A fixed-rate loan	Redraw within the lender's cap, or a split with the offset on the variable part	Offsets are usually unavailable on a fixed rate and extra repayments are capped. A split keeps a variable portion for the offset to work against.
Someone who spends what they can see	Redraw	A redraw request, a minimum amount and a day's delay are friction, and for some households that friction is the point.
Building an investment portfolio from home equity	Neither: a separate split	Debt recycling draws the investment money under its own account number so the purpose is clean from day one. The structure is in our debt-recycling guide.

How the choice falls across the loans we place, with the reason that decides it. The investment rows follow the ATO's position on redraw (sources 2 and 3); the fixed-rate row is lender credit policy as at 23 August 2026.

The two are not exclusive: a variable loan can carry both, and on most of the panel we place from it does.¹⁰ The working rule is simple: cash you could ever want back goes in the offset, and money you are certain you will never need can go in as an extra repayment, where it does the same job and nothing more. Where the offset costs an annual fee or a higher rate, the offset-versus-rate guide shows the balance at which it pays for itself; below that balance, the redraw loan at the sharper rate is the cheaper loan, and we place it.

The check that applies to both, and what to send us

Whichever you choose, the one check that applies to both is that the feature is actually working. Banks paid over $55 million in compensation in two years after ASIC's 2026 review found offsets never linked, or unlinked by a refinance or a product switch. A redraw facility can be capped, fee-bearing, or unavailable on the fixed-rate part of a split loan. We confirm the offset is live before the first repayment, and read the redraw terms first.

One boundary, stated plainly: this is general information only. It does not take into account your objectives, financial situation or needs, and it is not financial or tax advice. Which of offset, redraw or a split suits you depends on circumstances this guide does not know; the deductibility of investment interest is your accountant's call. Our part is the lending: the loan whose features match how you keep your money, with the offset switched on.

• Your loan balance, your repayment and whether any part is fixed, all on the latest statement.
• The cash you could hold against the loan, and whether it arrives as salary and leaves as bills.
• Whether the property is, or could one day become, an investment.