Mortgage offset accounts and redraw facilities are frequently discussed as if they are interchangeable. Both may reduce the interest charged on a home loan, but they operate differently.

An offset account is a separate bank account linked to a mortgage. Its balance is subtracted from the loan balance when the lender calculates interest.

If a borrower owes $500,000 and holds $30,000 in a 100 per cent offset account, interest is generally calculated on $470,000 while the money remains there.

The $30,000 has not repaid the mortgage. It continues to sit in a transaction or savings account and may normally be accessed for bills and purchases.

A redraw facility works through additional repayments made directly into the loan. Those payments reduce the outstanding balance, and the borrower may later be permitted to withdraw, or redraw, some of the extra amount.

Access to redraw money is controlled by the mortgage agreement. A lender may impose transaction limits, minimum withdrawal amounts or other conditions.

Some offset mortgages carry higher interest rates or annual package fees than basic loans. The interest saving should therefore be compared with the additional cost.

The benefit depends on the offset balance, mortgage rate and amount of time the money remains in the account. A near-empty offset attached to an expensive loan may deliver little value.

Borrowers should also confirm that they have a 100 per cent offset account. Partial offsets do not reduce the interest-bearing balance dollar for dollar.

ASIC has previously identified cases in which offset accounts were not properly linked, causing customers to pay more interest than expected. Homeowners should check their loan statements or ask the lender to confirm how the interest calculation is working.

Anyone who may later convert a home into an investment property should obtain tax advice before withdrawing extra loan repayments through redraw.

Using redrawn money for a private purpose may affect the tax deductibility of subsequent loan interest. Holding savings in an offset account normally does not alter the original purpose of the borrowed money in the same way.

Individual circumstances matter, and tax outcomes should be confirmed with an appropriately qualified adviser.

Borrowers should compare the interest rate, annual fees, access conditions and their own spending habits before choosing between the features.

An {offset account} may provide greater day-to-day flexibility. A {redraw facility} may suit someone who wants extra repayments to be less immediately accessible.

Neither feature compensates for an uncompetitive mortgage rate. Homeowners should examine the total loan cost rather than choosing a product because it includes a popular feature.