Should I make extra repayments or keep money in an offset account?

Compare cost and access

An offset loan may have an annual package fee or higher rate. Redraw may have minimum amounts, delays or restrictions. Compare the expected interest saving with these costs and decide how quickly emergency money must be available. Read the product terms rather than assuming every offset or redraw works the same way.

• Check whether the offset is 100% or partial.
• Confirm redraw limits and processing rules.
• Compare the offset package with a basic loan.
• Keep future investment-property tax issues in mind.

Behaviour matters

An offset provides easy access, which is useful for cash flow but can make savings easier to spend. Extra repayments may create a helpful barrier, although redraw can still be available. Choose a system you can follow consistently.

A cost example

Assume the offset option costs $395 a year more than a basic redraw loan. If your average offset balance saves only $250 in annual interest, the feature is not paying for itself on those figures. With a much larger balance, it may create clear value. Use the expected average balance, not the highest amount briefly held after payday. Interest is generally calculated daily, so the timing and duration of money in the account matter.

Emergency access and lender control

Offset funds are held in a transaction account and can usually be used through normal banking. Redraw represents extra money paid into the loan and remains subject to the facility terms. The lender may change access, impose minimums or limit redraw when the loan is fixed, restructured, closed or in arrears. Keep emergency funds in a structure that provides the access you require, and verify that the offset is correctly linked after any product change.

Tax can change the answer

If a current home may later become an investment property, withdrawing extra repayments through redraw can create new private-purpose borrowing and complicate interest deductibility. Taking cash from an offset generally does not change the original loan balance in the same way. The exact tax outcome depends on use and history, so obtain registered tax advice before acting. This potential future difference can make an offset valuable even when the immediate interest saving is similar.

Questions to ask before you proceed

• What are the interest rate, comparison rate, ongoing fees and total expected cost?
• How do the offset, redraw, extra-repayment and loan-split rules work in practice?
• What would the repayment become if rates rose or the selected feature changed?

Official guidance: Moneysmart: Mortgage offset accounts

This is general information, not personal financial, tax or legal advice. Lending criteria, fees and eligibility vary.

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