Home Loan Features

Offset vs Redraw

Two ways to put your savings to work against your home loan, and how to tell which one suits you.

Meet the Team Make an Appointment
How Your Home Loan Interest Actually Works | The Broker Society
The Broker Society
Client education tool

How your home loan interest actually works

Interest is not charged the way most people assume. It is worked out fresh every single day, then added up and taken from your account once a month. Once you can see that, a few small habits start to make a real difference. Move the sliders below and watch it happen.

The figures on this page are illustrations to explain the concept, not a quote or an offer. Your own numbers will depend on your loan, your lender and your circumstances, so talk to your broker before acting on any of it.
Part one

Daily interest, monthly charge

Every day, your lender looks at your loan balance and works out that day's interest. At the end of the month, all thirty (or so) of those daily amounts are added together and charged as one lump. That means a lower balance on more days of the month is what actually saves you money, not just a lower balance on the day your statement lands.

$500,000
6.00%
$3,000

Paying once a month

One repayment, on day 30
Day 1Day 30
Interest charged this month $0

Paying every week

Same total, split into four
Day 1Day 30
Interest charged this month $0
What weekly payments saved this month
$0
Same repayment total, same rate, same loan. The only difference is the balance sits lower for more of the month.
Part two

Salary onto the loan, everyday spending on a card

Some clients take this a step further. The day their salary lands, they put the whole amount straight onto the home loan. For the rest of the month they spend on a credit card with an interest-free period, then clear the card in full before it charges a cent. The loan balance stays low for almost the whole month instead of slowly draining as everyday spending happens.

$1,500

Normal spending account

Salary spent gradually through the month
PaydayDay 30
Interest charged this month $0

Salary onto the loan + card

Card cleared before the loan statement
PaydayDay 30
Interest charged this month $0
Saved this month
$0
Saved over a year
$0
Saved over 30 years
$0
The annual and 30 year figures are a simple projection, this month's saving repeated every month. They do not account for the loan balance reducing over time, changing rates, or how the saving is used, so treat them as a way to picture the effect, not a forecast. It only works if the card is paid off in full before interest applies, and if the loan has an offset or redraw facility to move cash back out to pay the card. Ask your broker whether your loan is set up for it.
Part three

Offset versus redraw: same $50,000, two different homes for it

Both an offset account and redraw can cut the interest you pay. The difference is where the money actually lives. Offset is a separate account sitting next to your loan. Redraw is extra money paid into the loan itself, sitting inside it.

$500,000
$50,000

Offset account

A separate account that sits next to the loan. The loan balance never changes, but interest is only charged on the difference.
Loan
Offset
$500,000
Loan stays at
$50,000
Sitting beside it
Interest is only charged on $450,000. The $50,000 stays fully accessible, any time.

Redraw

Extra repayments go straight into the loan. The loan balance actually drops, and the extra sits inside it as funds you can pull back out.
Loan
$450,000
New loan balance
$50,000
Available redraw
The loan balance drops to $450,000. The $50,000 is still yours, but it is inside the loan, not sitting beside it.
the broker society

This tool is general education about how home loan interest is calculated. It is not personal financial advice and does not take into account your individual objectives, needs or circumstances. Speak with your broker before making a decision.