Offset vs redraw: which actually saves more?

Both an offset account and a redraw facility do the same magic trick: they reduce the loan balance you're charged interest on, so your money "earns" your mortgage rate — guaranteed, and effectively tax-free. Dollar for dollar, they save the same interest. The difference is everything around that.

How each one works

An offset account is a normal transaction or savings account linked to your loan. Its balance is subtracted from the loan before interest is calculated, and you can spend from it any time like a regular account. A redraw facility lets you pull back the extra repayments you've made ahead of schedule — the money is inside the loan until you ask for it.

Where they differ

• Access. Offset funds are yours, instantly, like any bank account. Redraw can be slower, sometimes capped per transaction, and lenders can change or freeze the terms.
• Tax (if you ever rent the place out). This is the big one. Money in an offset is your savings — taking it out doesn't touch the loan. Redrawing, by contrast, is technically new borrowing; if you later rent the property out, redrawn funds used for personal spending can muddy the deductibility of your loan interest. Offset keeps that clean.
• Discipline. Redraw is a little harder to dip into, which some people prefer.
• Cost. Offset accounts sometimes carry a small package fee; make sure the interest saved beats it.

Offset vs a savings account

An offset usually beats parking cash in savings, because savings interest is taxed. A 5% savings account at a 30% marginal rate is really ~3.5% after tax; an offset returns your full mortgage rate with no tax. For anyone with a home loan, that's hard to beat with cash.

The bottom line

If you might ever turn the home into an investment, or you want your savings fully liquid and clearly yours, offset is usually the cleaner choice. If you just want somewhere to stash extra repayments and value the tiny bit of friction, redraw is fine. Either way, keeping cash against the loan almost always beats a taxed savings account.

Related: rent vs buy · first home buyer schemes. General information only, not financial advice.