Offset account or redraw? Paying off your home faster

If you have spare cash and a home loan, putting that money against the loan is one of the simplest ways to cut the interest you pay. There are two common ways to do it: an offset account or a redraw facility.

For the interest bill, they do the same job. The difference is what happens to the money — and that difference matters far more than most people realise if your home might one day become an investment property.

How an offset account works

An offset account is a transaction account linked to your home loan. The balance in it reduces the amount of the loan that's charged interest.

If you owe $600,000 and have $40,000 in your offset account, you're only charged interest on $560,000. Interest on most home loans is calculated daily, so the more you keep there, and the longer it stays, the more you save.

The money is still your savings. You can have your pay deposited into it, pay bills from it and use a debit card with it.

Offset accounts usually come with variable-rate loans, and some lenders charge for them through a higher rate or a package fee.

How redraw works

A redraw facility lets you make extra repayments onto the loan and take them back out later if you need them.

Once you make an extra repayment, that money has been paid off the loan. When you redraw, you're borrowing it again. Lenders can limit how much you redraw, charge a fee, or take time to release the funds, depending on your loan terms.

The interest saving is the same

A dollar in offset and a dollar paid into redraw reduce the interest-charged balance by the same amount.

So if the saving is identical, why does it matter which you use? Three reasons.

1. Access and control

Offset money sits in an everyday account. Redraw money is in the lender's hands, subject to the loan terms, and they can change those. If you're relying on that money as your emergency fund, offset is the more reliable place for it.

2. Discipline

Redraw puts a small barrier between you and the money, which some people find useful. Offset is easier to dip into. Be honest about which suits you.

3. Tax, if your home ever becomes an investment

This is the one that catches people out.

For tax, whether interest is deductible depends on what the borrowed money is used for. If you move out and rent your home, the interest on the loan used to buy it becomes deductible against the rent.

• With an offset account: your loan balance stays at the full amount. When you move out, you can take your savings out of offset to use as a deposit on your new home. The investment loan is still the full original balance, and the interest on it can be deductible.
• With redraw: you've paid the loan down. If you then redraw that money to buy your new home, you've re-borrowed for a private purpose. The ATO looks at what you used the redrawn money for, so the interest on that part isn't deductible — and once a loan mixes private and investment borrowing, it's hard to untangle.

For established properties bought after 12 May 2026, deductible interest can only reduce tax on residential property income from 1 July 2027. But whatever it's deducted against, the redraw trap still shrinks the deduction. See negative gearing after the 2026 Budget.

Rule of thumb: if there's any chance you'll rent out the home you live in now, keep your savings in an offset account, not in redraw.

Which should you use?

An offset account is usually worth paying for when you keep a meaningful balance in it. If your balance is usually small, Moneysmart suggests the cost may outweigh the saving.

Other ways to pay off your home faster

• Pay fortnightly instead of monthly. Paying half your monthly repayment every fortnight adds up to the equivalent of an extra month's repayment each year.
• Put windfalls against the loan — a tax refund or bonus, into offset or as an extra repayment.
• Review your rate every year. Ask your lender to match a better rate, and switch if the savings outweigh the costs.
• Avoid interest-only on your own home where you can. With interest-only, the debt doesn't go down.

If you have an investment loan too

Investors usually do the opposite with their spare cash: they put it in the offset account on the home loan, where the interest isn't deductible, rather than paying down the investment loan, where it may be. And they keep investment borrowing in its own loan split, with nothing private mixed in. See how to use equity to buy an investment property.

Structure like this depends on your circumstances, so get advice from a registered tax agent before you move money between loans.