Important
When setting up a home or investment loan, many borrowers are offered either an offset account or a redraw facility. While both can reduce the interest you pay, they are structured differently — and that structure can have long-term implications for flexibility, cash flow, and potential tax outcomes.
When setting up a home or investment loan, many borrowers are offered either an offset account or a redraw facility. While both can reduce the interest you pay, they are structured differently — and that structure can have long-term implications for flexibility, cash flow, and potential tax outcomes.
Below is a clear breakdown of how they work and why the distinction matters.
Loan Facility Basics
A loan facility is simply the maximum amount you are approved to borrow.
For example:
- Loan facility limit: $800,000
That is the cap under your loan agreement.
What Is a Redraw Facility?
A redraw facility typically operates as one account.
Example:
- Loan facility: $800,000
- Extra repayments made: $200,000
- Current loan balance: $600,000
- Available redraw: $200,000
In this structure:
- Your loan balance is reduced to $600,000.
- Repayments are generally calculated on that lower balance.
- Interest is charged on $600,000.
This often results in lower monthly repayments, which can assist with cash flow.
However, the additional funds paid into the loan are treated as loan repayments, not as separate savings.
What Is an Offset Account?
An offset structure typically involves two linked accounts:
- The loan account (e.g. $800,000 outstanding), and
- A separate offset account (e.g. $200,000 in savings).
In this case:
- You still legally owe the full $800,000.
- Interest is calculated on the net amount: $800,000 minus $200,000 = $600,000.
- Repayments are generally based on the full loan balance.
While interest may be similar to redraw in this example, repayments are typically higher because they are calculated on the full loan amount. This will pay down the loan principal more quickly.
Key Differences
Redraw facility
- One account
- Lower repayments (based on reduced balance)
- Interest charged on net balance
- Extra repayments become part of the loan
Offset account
- Two separate accounts
- Higher repayments (based on full loan balance)
- Interest calculated on net amount
- Savings remain separate and accessible
Flexibility and Equity
Both options can help build equity and reduce interest.
You can improve your position by:
- Paying down the loan balance (redraw), or
- Increasing the balance in the offset account.
However, offset accounts generally provide greater flexibility as circumstances change. Because the loan principal does not reduce, the borrower retains clearer separation between debt and savings.
Why Structure Matters
Over time, circumstances can change — a property may become an investment, a new property may be purchased, or borrowing purposes may shift.
Because redraw changes the loan balance, and offset does not, tax outcomes can differ depending on how funds are later accessed and used.
For this reason, offset arrangements are often preferred by borrowers who value long-term flexibility and cleaner structuring.
Which Is Better?
There is no universal answer.
- If immediate cash flow is the priority, redraw may be suitable.
- If flexibility and future-proofing are important, offset is often the more adaptable structure.
The appropriate option depends on individual goals, financial position, and future plans.
Disclaimer: This article provides general information only and does not take into account your personal financial circumstances. It is not financial or tax advice. You should seek independent advice from a qualified professional before making decisions about tax, legal or financial planning matters, along with loan structures or entity structure.
