Offset, Redraw and the Power of Extra Repayments
When you're paying off your home loan, small changes to how you use your loan features can make a huge difference to what you pay back over time.
If you listened to Episode 21: Unlocking How Your Mortgage Actually Works, we talked about how interest is calculated daily. That means even the small decisions about where you keep your money and how you structure your repayments can save you years off your loan and thousands in interest.
Offset and redraw both help reduce interest, but they work differently in the background, which can affect your flexibility later on, especially if your home ever becomes an investment property.
So in this resource, we're breaking it all down. We'll cover:
What an offset account actually is
What a redraw facility is
The key differences between them
How to use each strategically
How extra repayments can save you time and money over the life of your loan
This resource supports Episode 31 of the First Home Unlocked Podcast: Unlocking Offset, Redraw and the Power of Extra Repayments.
What An Offset Account Actually Is
An offset account is just a normal everyday bank account that's linked to your home loan. You can have your income paid into it, tap your card, pay bills, and move money around like any other transaction account. The difference is that it's linked to your home loan in the background, and this helps you reduce the interest you pay on your loan.
How an Offset Reduces Your Interest
Each day, the bank looks at two numbers:
How much you still owe on your loan
How much money is sitting in your offset account
They take your loan amount, minus whatever's in your offset, and only charge interest on what's left.
Example:
Your loan is $800,000
You have $50,000 in your offset
The bank will only charge interest on $750,000
You're not earning interest like you would in a savings account. Instead, you're reducing the interest on your home loan. Interest is calculated daily and then charged monthly. This means:
Every single day that money sits in your offset has an impact
The more days your offset balance is high, the more interest you avoid
This is why having your salary paid straight into offset and then spending from it over the month can make a real difference over time.
Offset Does Not Reduce Your Minimum Repayment
One common misconception is that if you have money in offset, your minimum home loan repayment will drop, but your repayment actually stays the same regardless of what's in your offset account. What does change is how that repayment is split between interest and principal. By having money in your offset:
Less of your repayment is going towards interest
More of your repayment is actually paying down the principal (reducing the loan balance)
So you get ahead on your loan faster, even though the repayment amount looks the same in your banking app.
The Impact of Offset Balances: A Practical Example
Let's walk through an example showing the impact of your offset account.
Scenario:
$800,000 property purchase
You use the 5% Deposit Scheme
$760,000 loan
Interest rate of 5.45%
Minimum monthly repayment of $4,291
If you made no extra repayments at all and had no savings in your offset account, and assuming interest rates never changed, you would pay back around $785,000 in interest over 30 years on top of your original loan amount of $760,000. Now let's look at what happens when you put your emergency fund in your offset:
If you held $20,000 in offset for the life of the loan:
Your total interest would drop by around $77,000
You'd save roughly one and a half years off your loan
If you held $30,000 in offset for the life of the loan:
The interest you save increases to around $112,000
You'd pay the loan back about two years sooner
If you kept $50,000 sitting in offset for the life of the loan:
Your interest reduces by around $177,000
You repay the loan roughly three and a half years earlier
And this is without changing your budget or making extra repayments, you're simply letting your savings sit in the right place (in your offset) so they work for you every single day.
Making Sure Your Offset Is Linked
Last year there was a bit of news about offset accounts not being linked at some of the major banks. This can be an issue, and it happens during the loan application and in your loan documents. Chris has seen it happen where clients come to him years down the line and they've never had their offset account linked properly, even at the big banks. So it's one of the things you definitely want to check after your loan settles and make sure they're connected.
What you can do:
Call the lender and check they're linked
Get your broker to check with the bank
Our team checks as part of setting up the loan
If it was a bank error, often they'll just fix it up and recalculate your interest. But if it's something you or a broker should have done, it can be a real issue, so just be really careful with that and check after settlement.
The Cost of an Offset Account
Just so you're aware, to have access to an offset account, most lenders charge an annual package fee, usually around $395 per year, but the benefits of using your offset will far outweigh this cost in most cases.
What Redraw Actually Is
Redraw is similar to an offset account. It also helps reduce the interest you pay on your loan but redraw works differently in the background.
Redraw Lives Inside the Loan
Redraw is not a separate account with its own BSB and account number, it lives inside your home loan. Here's what happens:
You make your normal minimum repayments each month
On top of that, you choose to pay extra into the loan
When you pay more than your minimum repayment, your loan balance drops below where it needs to be according to the minimum repayment schedule
The bank counts that extra amount as your "redraw"
Example:
Your original loan was $800,000
Over time you've paid it down to $750,000
But based on the minimum repayment schedule, you only needed to be at $770,000
That means along the way, you've paid an extra $20,000 into the loan, above your minimum repayments
This extra $20,000 you've paid is what's available in your redraw, so in your banking app, you'll see:
Loan balance: $750,000
Available redraw: $20,000
While that extra money is sitting inside the loan as redraw, you're not paying interest on it.
Accessing Redraw Is Not Always Instant
Where redraw really feels different to offset is how you get your money back out. With offset, you can spend directly from the account, but with redraw, you usually need to transfer money out of the loan and back into your everyday account before you can use it. Most of the time this is simple, but there are some important considerations to be aware of, depending on the lender and the loan:
Some redraws are instant and available within the app
Some have minimum redraw amounts
Some have daily limits on how much you can redraw
And if you've missed repayments, entered a hardship arrangement, or the bank has changed its redraw policy, your access can be limited or delayed.
When Banks Changed Redraw Rules
We've also seen examples in the past where banks have changed redraw rules during times of economic stress, and customers who thought they could access their redraw lost access to their extra repayments, or the rules around how much they could redraw were changed.
In saying that, these decisions were eventually overturned by the banks. But it's a good reminder that redraw is part of the loan contract, so ultimately the bank controls the rules.
What actually happened:
ME Bank redraw freeze (2020):
ME Bank reduced how much customers could redraw overnight
Many borrowers woke up to find thousands of dollars suddenly unavailable
The bank said the goal was to stop people from falling behind, but it caused huge stress because people thought that money was theirs
It highlighted that redraw can legally be restricted at any time
Decision overturned: ME Bank reversed its decision to freeze and slash home loan redraw limits in early May 2020, just a few days after initially implementing the changes and receiving intense backlash
CBA automatic repayment term changes:
CBA shortened loan terms for customers far ahead on repayments, which forced minimum repayments to increase
This reduced the amount sitting in redraw and impacted people's cash flow
Customers didn't request this, it was an automatic internal change
Decision overturned: After 5 months following an investigation from ASIC
Chris has always been a huge advocate of offset accounts, and one of the reasons is because he just doesn't trust banks with redraw. It's much easier to access your offset account. It's a savings account linked to your loan. It's not part of your loan. It's extra cash that's just offsetting your loan.
You've got full flexibility and liquidity, and it's just much better protected. It's actually savings. With redraw, there are rules around it, and those rules can change at different banks. And banks could potentially change those rules.
When ME Bank and CBA did this, it was proof that these things could happen. They got overturned, but that didn't change the fact that the banks even tried.
Offset vs Redraw: Key Differences and Strategy
Now that we've explained offset and redraw separately, let's talk about the key differences from a property strategy point of view. Both offset and redraw reduce the amount of interest you pay, which can help you save money and time in paying off your loan, but the structural differences are important, especially when we talk about tax, behaviour, and future plans.
Tax and Future Investment Considerations
As mortgage brokers, we can’t give you tax advice. What we can do is explain how these loan features work from a structural perspective, and highlight the tax considerations you should discuss with a tax accountant.
One of the biggest long-term differences between offset and redraw can come up if a property later becomes an investment property.
As a general rule, interest on a home loan is not tax deductible while you’re living in the home. If the property later becomes income producing, by receiving rental income, interest on the loan may become deductible. The key factor the ATO generally considers is what the borrowed money was used for.
With an offset account, your savings sit in a separate linked account. You reduce the interest charged, but the loan balance itself does not change.
With redraw, when you make additional repayments, you reduce the loan balance. If you later redraw funds and use them for personal purposes, that portion of the loan may be treated as private debt for tax purposes. That can affect how interest is treated in the future.
So if there’s any realistic chance that your first home might become an investment down the track, the tax implications of offset versus redraw could be very different.
This is exactly the type of scenario where speaking with a tax accountant is really valuable. The tax treatment can become quite specific depending on how funds are used.
Behaviour and Money Psychology
Money psychology is also really important when it comes to your offset and redraw strategy.
Offset tends to work best for people who can look at their account balance without feeling the urge to spend it. If you already use a bucket-style budgeting system where you have buckets for bills, savings, and buffers, using a lender with multiple offset accounts can work really well as each bucket still helps reduce your interest while keeping your money organised. Also if you want the flexibility to move money quickly as life changes, offset can feel really helpful.
Redraw, on the other hand, can be a better fit for someone who prefers to keep their extra money at arm's length. If you know you're the type who will spend whatever is sitting in your bank accounts, putting extra into redraw can create that buffer you need, as there are extra steps involved to access the money. Also, because it's sitting inside the loan and the balance looks lower, people often feel less tempted to touch it and taking it back out feels like undoing your hard work.
The Combination Approach
For many first home buyers, a combination works really well.
You might keep your emergency fund in offset where you can reach it easily, and then pay any extra surplus into redraw to reduce temptation to spend it and keep yourself on track.
The Key Takeaway
There's no single structure that suits everyone. The right setup really comes down to how you operate day to day. You want to match your loan features to things like:
How you manage your money
Whether your first home could become an investment later
How important flexibility and quick access to cash is for your situation
How you behave when money is sitting in your account
The Power of Extra Repayments
Now that we've covered offset and redraw, let's talk about the power of making extra repayments because even small amounts can make a big difference over the life of a 30-year loan.
Extra Repayments Example
Let's use the same scenario as before:
You purchase for $800,000 using the 5% Deposit Scheme
You start with a $760,000 loan
Interest rate is 5.45%
Minimum monthly repayments of $4,291
If you made no extra repayments, rates stayed the same, and you didn't use an offset, you'd pay close to $785,000 in interest over 30 years, on top of your original loan amount of $760,000.
Small Extra Repayments Make a Massive Difference
Now let's break down what happens if you're able to make extra repayments. For these examples, to keep it simple, there are no funds in your offset account.
If you contributed an extra $100 per month (or $25 per week) for the life of the loan:
Your interest would reduce by about $51,000
You'd pay the loan off roughly one and a half years sooner
If you contributed an extra $200 per month (or $50 per week) for the life of the loan:
You'd save around $95,000 in interest
You'd shorten your loan by about three years
If you contributed an extra $400 per month (or $100 per week) for the life of the loan:
You'd save around $167,000 in interest
You'd pay off your mortgage about five and a half years earlier
As you can see, whatever amount you can comfortably put towards your loan, even small, consistent amounts, can make a huge difference over time.
Offset vs Extra Repayments
If the money you're using for extra repayments is the same money that would have sat in your offset account anyway, there's no additional benefit to making extra repayments. This is only true if the money would have stayed in offset for the life of the loan.
Seasons of Life and Extra Repayments
One last thing about extra repayments: they don't need to be consistent forever. Most people go through seasons where they have some extra in their budget they can put into the loan, and other times where things tighten up.
The key is to take advantage of the times where you do have extra capacity, because even small amounts in those times can compound into huge long-term savings for you and they also build buffers you can use when life gets busier or more expensive.
Final Thoughts
So both offset and redraw help reduce your interest, but they work differently when it comes to flexibility, your money habits, and tax deductibility if your home becomes an investment property.
Another benefit is that even small extra repayments can help you save years off your loan and save you thousands in interest. The right structure comes down to how you manage money, your future plans, and your behaviour.
If you'd like help choosing the right structure for your situation, you can Book a Get to Know You Chat.
