Offset vs Redraw 2026: Which Saves More?

How an Offset Account Works

An offset account is a transaction account linked to your home loan. Instead of earning interest on your savings, the balance is "offset" against your mortgage when interest is calculated. With a $500,000 loan and $50,000 in offset, you pay interest as if you owed $450,000 - but your required repayment stays the same, so more of each payment attacks the principal.

At a 6% rate, that $50,000 offset saves about $3,000 per year in interest and can shave years off the loan - all while the money remains fully accessible for everyday use. It is the equivalent of earning a guaranteed, tax-free 6% return on your savings.

How a Redraw Facility Works

A redraw facility lets you withdraw extra repayments you have already made above the minimum. Pay an extra $20,000 into your mortgage and most lenders let you "redraw" it later if needed. The interest saving is identical to offsetting while the money stays in the loan.

The catch is access: redraws can have minimum amounts ($500-$2,000 is common), processing delays, and in rare cases lenders can reduce or freeze redraw limits. Your money is working harder, but it is not quite as liquid as cash in an offset account.

The Break-Even Maths: When Offset Justifies Its Price

Offset loans usually cost more: a rate premium of roughly 0.10% to 0.20% plus an annual package fee of $300 to $400. So run the numbers. Take a $600,000 loan at 6.5% with $100,000 sitting in offset. The offset saves $100,000 × 6.5% = $6,500 a year in interest.

The premium costs 0.15% × $600,000 = $900 a year, plus a $395 package fee, for a total cost of $1,295. Net benefit: about $5,205 a year. The offset wins by a mile.

Now shrink the offset balance to $20,000. Saving: $1,300 a year. Cost: still $1,295. You are roughly $5 ahead, before the hassle. The break-even offset balance here is about $20,000 ($1,295 ÷ 6.5%). Below it, take the cheaper basic variable loan and use redraw; above it, the offset package pays for itself many times over.

Revisit the maths annually. The package fee is charged whether or not your offset balance justifies it, so a balance that earned its keep last year may not this year if you have drawn it down for renovations or a new car. An offset package with an empty offset account is the most expensive way to hold a home loan.

What the RBA Hike Cycle Changed

The value of an offset balance is exactly your mortgage rate, so rising rates make offsetting more powerful. After the RBA's September 2026 hike, the fourth rise of the year, the cash rate sits at 4.60%, and typical variable home loan rates are around 6.5% to 7%. Every dollar in offset now 'earns' that rate, tax-free and risk-free.

That cuts both ways. Higher rates also mean the package fee and rate premium sting more in absolute terms, and borrowers under repayment pressure may find their offset balance shrinking as living costs rise. An offset facility only saves you money on the balance that is actually in it. If rate rises have drained your savings, reassess whether the package is still worth its fee.

The Key Differences That Actually Matter

Liquidity: offset wins - it is your transaction account, available instantly. Redraw usually involves a request and limits. Cost: offset loans often carry a slightly higher rate or annual package fee ($300-$400 per year is typical); redraw is frequently free on variable loans. Discipline: offset requires you to actually keep savings there; redraw forces the money into the loan first, which suits spenders.

Tax is the sleeper issue for investors: if you later convert the home into an investment property, money in an offset account keeps the full loan deductible, while redrawn funds can contaminate the loan's tax deductibility. Investors should get tax advice before choosing - this single factor decides it for many.

Five Scenarios, One Winner Each

The dual-income couple with a $60,000 emergency fund: offset. The money stays liquid and saves interest every day it sits there. The disciplined saver who never touches spare cash: redraw on a basic variable loan. Same interest saving, no package fee.

The future investor buying a home they will one day rent out: offset, no contest, for the deductibility reason above. The freelancer with lumpy income: offset, because redraw minimums and delays are painful when cash flow is uneven. The borrower with $5,000 in savings and a $700,000 loan: neither premium product; take the cheapest rate and make extra repayments into redraw for free.

One more scenario that decides it for couples: the offset account doubles as the household transaction account, so both salaries land there and every bill is paid from it. The average balance across the month, not the end-of-month balance, is what offsets interest, so routing all cash flow through offset squeezes extra saving from money that would otherwise sit in separate accounts earning little. Redraw cannot replicate this because the money must first be committed to the loan.

Which Suits Your Situation?

Choose offset if: you keep substantial cash savings (emergency fund, deposit for the next property), you value instant access, or you might one day rent the property out. Choose redraw if: you want every spare dollar crushed into the loan, you do not need frequent access, and you prefer not to pay package fees.

Many borrowers do not have to choose absolutely - some loans offer both, and the real question is behavioural: will the money actually stay put? The best facility is the one matching how you handle cash, not the one with the cleverest brochure.

• Compare repayment scenarios

The Investor's Playbook: Debt Recycling With Offset

For future investors there is an advanced move worth understanding: debt recycling. The idea is to convert non-deductible home loan debt into deductible investment debt over time. You keep cash in the offset account (keeping the home loan balance high but interest low), then draw from offset to invest, for example into shares. The interest on the portion used for investing can become deductible while your non-deductible balance stays contained. Redraw contaminates this strategy because redrawn funds blur the loan's purpose; offset keeps the paper trail clean.

This is not a DIY project: the tax treatment depends on the precise use of every dollar, and mistakes are expensive. But the structural point stands even for non-investors: offset preserves optionality that redraw destroys. Money in offset is still your money, earmarked however you choose later. Money paid into the loan is the bank's money until they let you have it back. Get independent tax advice before attempting anything labelled a strategy.

Sources

The figures and policy details in this article come from the following primary sources, checked at the time of writing.

• RBA media conference, 29 September 2026 monetary policy decision