With interest rates rising, many borrowers are taking the time to review their home loan arrangements. A review of your loan structure may assist in managing repayments, subject to your individual circumstances.
Offset accounts and redraw facilities are features offered on some home loans. When used appropriately, they may help reduce the interest payable and overall loan costs, depending on individual circumstances.
Offset accounts
An offset account is a transaction or savings account that’s linked to your home loan. The money you have in this account ‘offsets’ your loan balance when your lender calculates interest.
So, if your loan balance is $500,000 and you have $50,000 in a 100% offset account, the bank will only charge you interest on $450,000.
You generally don’t earn interest on the balance held in the offset account. Instead, the money is actively reducing interest charges.
Key benefits:
- Interest savings. The balance in the offset reduces the interest charged on your home loan.
- Flexibility. Funds aren’t locked away. You can access the money immediately for daily transactions and ATM withdrawals.
- Tax-effective savings on interest. Interest savings are generally not treated as taxable income. However, tax outcomes can vary depending on your individual circumstances, so it’s important to seek advice from a qualified tax professional. Offset accounts may provide an effective after-tax benefit similar to your loan interest rate, depending on your circumstances.
- Help reduce the loan term over time. By reducing interest, a bigger chunk of your regular repayment goes towards the principal, reducing the overall mortgage term.
- Good for investors. For investment properties, using an offset account instead of a redraw facility ensures that if the money is withdrawn, the tax deductibility of the loan interest is maintained.
Potential drawbacks:
- Potentially higher fees. If the offset account comes with a loan package, there may be annual fees attached.
- Potentially higher interest rates. In some instances, loans with offset accounts may come with higher interest rates.
- Limited availability. Offsets are usually attached to variable-rate loans, not fixed-rate mortgages.
Redraw facilities
With a redraw facility, you can make extra repayments in addition to your minimum fortnightly or monthly home loan repayment. The extra funds reduce the loan balance, which lessens the amount of interest you pay. You can redraw the funds in future as required.
So, if your loan balance is $500,000 and you repay an extra $50,000, the new loan balance is $450,000. The lender will charge interest on that amount.
Key benefits:
- Interest savings. By making extra repayments, you reduce the principal loan balance and the interest payable.
- Help reduce the loan term over time. Making extra repayments regularly may help you to pay off your mortgage sooner.
- Repayment holidays. If you are ahead on repayments, some lenders may allow you to reduce or pause repayments, subject to their terms and conditions.
- Less temptation to spend. Your funds may be harder to access than with an offset account, making it easier to save.
Possible drawbacks:
- Restricted access. Lenders often set limits on withdrawals (though this could be a good thing and keep you accountable to your savings targets).
- Contamination risk for investors. If the redraw is attached to an investment property, using the redraw for personal expenses may impact the deductibility of interest (it’s a good idea to chat to your accountant about your personal tax situation).
- Limited availability. Redraw facilities usually come with variable-rate loans, not fixed-rate mortgages.
Please note that while these features may help reduce interest costs, they also come with limitations and may not be suitable for all borrowers.
Why a record number of Aussies are refinancing
In 2025, more than 640,000 homeowners refinanced their mortgage, representing a 20 per cent jump from the previous year.
With multiple interest rate hikes so far this year, many borrowers will be looking to refinance to a loan with a more competitive interest rate or one with interest-saving features.
Whether refinancing is right for you depends on a range of factors, including your financial situation and goals. If it’s an investment property, you’ll also want to consider the tax implications for offset accounts versus redraw facilities.
bspoke finance – tailored lending for everyday people
