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hscscience Maths Adv · Y12
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Module 7 · L15 of 20 ~40 min ⚡ +100 XP available

Extra Repayments, Offset & Redraw

What if you could pay off your home loan years earlier without changing your lifestyle? Extra repayments, offset accounts and redraw facilities are the three most powerful tools for destroying debt faster than the bank planned. Calculate exactly how much time and money each strategy saves, and discover why the banks do not advertise these benefits.

Today's hook, An extra $\$353$ a month on a $\$400,000$ mortgage sounds insignificant. The maths says otherwise: it wipes out 7.5 years and saves $116,000 in interest. Banks know this. They are not in a hurry to tell you.
0/5QUESTS

Get oriented

Recall what you already know and settle the terms for offset and redraw.

Worksheets

Practise this lesson

Three printable worksheets that build from foundations to mastery, or build your own from any module’s questions.

Build Foundations & guided practice Apply Application practice Master Mastery challenge Build custom Build your own from any module question
01
Recall, your gut answer first
+5 XP warm-up

A $\$400,000$ loan at 5% p.a. over 30 years has a minimum monthly repayment of $\$2,147$. The borrower pays $\$2,500$ every month instead, an extra $\$353$.

Without calculating do you think this small extra payment saves: (a) less than 1 year, (b) 2–5 years, or (c) more than 5 years? Predict before you learn.

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02
What you'll master
Know

Key facts

  • How extra repayments reduce loan term and total interest
  • How offset accounts work mathematically
  • The difference between offset accounts and redraw facilities
Understand

Concepts

  • Why early extra payments save more than late extra payments
  • The opportunity cost of money in offset vs other investments
  • Why banks prefer minimum repayments
Can do

Skills

  • Calculate years and interest saved with extra repayments
  • Compare offset account benefits against savings accounts
  • Evaluate redraw vs offset for different scenarios
  • Build a debt-reduction strategy
03
Key terms
Extra repaymentAny payment above the minimum. Every dollar goes directly to reducing principal.
Offset accountA transaction account linked to a loan, the balance is subtracted from the loan balance before interest is calculated.
Redraw facilityAllows a borrower to withdraw extra repayments already made. Reduces principal while money stays available.
Effective balance$P - \text{offset amount}$, the balance on which interest is actually charged.
PrincipalThe outstanding loan balance not yet repaid.
Compounding effectReducing principal early prevents compound interest from building on that dollar for the remaining loan term.

See what extra repayments do

Work out how paying more changes both the term and the total interest.

04
The power of extra repayments
core concept

Every dollar above the minimum repayment goes straight to principal. Because interest is calculated on the remaining balance, reducing principal early has a compounding effect that accelerates over time.

$$n_{\text{new}} = \frac{-\ln\!\left(1 - \dfrac{P \cdot r}{M_{\text{new}}}\right)}{\ln(1+r)}$$

$P$ = principal, $r$ = monthly rate, $M_{\text{new}}$ = new (higher) monthly payment, $n$ = number of months remaining

Interest saved compared to minimum repayments:

$$\text{Interest saved} = M_{\text{old}} \cdot n_{\text{old}} - M_{\text{new}} \cdot n_{\text{new}}$$

Example, $\$400,000$ at 5% p.a. (min $\$2,147$/month):

Monthly paymentTermTotal interestInterest saved
$2,147 (minimum)30 years$373,000
$2,50022.5 years$257,000$116,000
$3,00017.5 years$185,000$188,000
$3,50014.5 years$145,000$228,000

An extra $\$353$/month saves 7.5 years and $\$116,000$. That is a 111% return on the extra money invested over the life of the loan.

Why early payments matter most. Paying an extra dollar in Year 1 prevents that dollar from compounding for 29 more years. The same dollar paid extra in Year 25 only prevents 5 years of compounding. Attack the principal when the balance, and therefore the interest, is highest.

Extra repayments reduce principal, reducing the balance on which compound interest grows; Formula: $n_{\text{new}} = \dfrac{-\ln(1 - Pr/M_{\text{new}})}{\ln(1+r)}$ to find the new term

Pause, copy the new-term formula $n_{\text{new}} = \dfrac{-\ln(1 - Pr/M_{\text{new}})}{\ln(1+r)}$ and the principle (extra repayments hit principal directly, not interest) into your book.

Quick check: A borrower pays $\$500$ extra per month on their mortgage. Where does this extra $\$500$ go?

Work the examples and compare

Follow two worked problems, then set offset against redraw.

Worked examples · offset & extra repayments

PROBLEM 1 · NEW TERM WITH EXTRA REPAYMENTS

A $\$500,000$ loan at 5.2% p.a. has a minimum repayment of $\$2,748$/month. The borrower pays $3,200/month. How many months until the loan is paid off?

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$r = 0.052 \div 12 = 0.004\overline{3}$
Convert annual rate to monthly rate.
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PROBLEM 2 · OFFSET ACCOUNT

A $\$300,000$ loan at 4.8% p.a. has a minimum repayment of $\$1,573$/month. The borrower has $40,000 in an offset account. Find: (a) the effective balance, (b) the new minimum repayment, (c) interest saved in the first month.

1
$r = 0.048 \div 12 = 0.004$
Monthly rate.
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Did you get this? True or false: keeping $50,000 in an offset account on a 5% loan earns the same as a savings account paying 5% interest (taxed at 32.5%).

05
Offset vs redraw, the comparison
core concept

We just saw that paying $\$353$ extra per month can save 7.5 years and $\$116,000$ in interest, because extra money hits principal directly. That raises a question: banks offer two structures for parking spare cash, offset accounts and redraw facilities, which strategy wins and why? This card answers it → comparing the tax-free interest-saving rate of offset against redraw's locked-in approach.

Both offset and redraw reduce the balance on which interest is calculated. The difference is accessibility and tax treatment.

FeatureOffset accountRedraw facility
AccessibilityInstant (ATM, card, BPAY)Request required, takes 1–3 days
Tax treatmentNot taxable (you're saving, not earning)Same, not taxable
FeesOften an annual account fee (~$300–$400)Usually free or low cost
Best forDaily transaction account / emergency fundLump-sum extra repayments
RiskLender can freeze access if you defaultSame, lender controls
Offset: mathematical effect
$\text{Interest} = (P - \text{offset}) \times r$. For every $\$10,000$ in offset at 5%, you save $\$500$/year in interest, guaranteed, tax-free.
Redraw: same maths
Redraw reduces the outstanding principal in the same way as offset, but the money is locked in until you request it back.
Offset vs savings account
Savings at 4%, taxed at 32.5% = 2.7% after tax. Offset at 5% = 5% guaranteed, tax-free. Offset wins every time when loan rate > after-tax savings rate.

Offset & redraw both reduce effective principal, but neither permanently reduces the stated loan balance; Both are reversible: offset money can be withdrawn; redraw money can be re-accessed by request

Pause, copy the offset interest formula $\text{Interest} = (P - \text{offset}) \times r$ and the key comparison (offset: instant access, fees apply; redraw: locked until requested, usually free) into your book.

Fill in the blank: An offset account reduces the balance on which ___ is calculated. The mathematical effect is: Interest $= (P - \_\_\_) \times r$.

Avoid the offset traps

Stop treating an offset as a permanent reduction in principal.

Common errors · the 3 traps that cost marks

Trap 01
Thinking offset reduces principal permanently
Wrong: "the offset reduced my loan to $\$350,000$." Right: the original loan is still $\$400,000$ on paper, interest is just calculated on $350,000. You can withdraw the offset money at any time, and the interest charge rises back immediately.
Trap 02
Comparing gross offset return to net savings return
Always compare like-for-like. Offset returns 5% tax-free. A savings account at 6% taxed at 32.5% returns only 4.05% after tax, the offset still wins. Adjust the savings rate before comparing: $r_{\text{savings}} \times (1 - t)$.
Trap 03
Forgetting the monthly rate conversion
The formula uses the monthly rate $r = r_{\text{annual}} \div 12$. Using the annual rate directly in the $n$ formula gives a wildly wrong answer. Always divide by 12 first.

Match each feature to the correct product:

  • Instant ATM access
  • Requires withdrawal request
  • Not taxable, saving, not earning
  • Often has annual account fee
  • Offset account, the bank charges to maintain the linked account
  • Both, neither pays you interest, they reduce interest charged
  • Redraw facility, the money sits inside the loan
  • Offset account, it is a transaction account in its own right

Drill it and revisit

Run the drill, then return to your opening answer and name what has changed.

Quick-fire practice · 4 calculations

1

A $\$400,000$ loan at 5% p.a. monthly. Extra $\$300$/month above minimum ($2,148). Estimate (or calculate) the years saved.

2

Same loan, extra $500/month. Total interest saved vs minimum?

3

A $\$400,000$ loan at 5%. Offset of $\$50,000$. What is the effective balance, and what is the monthly interest saving?

4

Is keeping $50,000 in offset better than a savings account at 4% p.a. taxed at 32.5%? Show your comparison.

Did you get this? True or false: extra repayments made in the first year of a mortgage save more total interest than the same extra repayments made in the final year.

08
Revisit your thinking

Earlier you predicted whether an extra $\$353$/month would save less than 1, 2–5, or more than 5 years. The answer: paying $\$2,500$ instead of $2,147 on a $400,000 loan at 5% pays off the loan in approximately 22.5 years, saving 7.5 years. Total interest drops from $373,000 to $257,000, a saving of $116,000.

An extra $\$4,236$/year saves $\$116,000$ over the loan life. The return is extraordinary because every extra dollar attacks the principal when the balance, and therefore the compounding, is at its highest.

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Practise extra repayments

Write full short-answer responses, then check them against the model answers.

01
Multiple choice
+5 XP per correct · +25 XP all-correct

Pick your answer, then rate your confidence. That tells the system what to drill next. Each retry pulls a fresh mix.

02
Short answer
ApplyBand 43 marks

Q1. A $\$300,000$ loan at 5.4% p.a. compounded monthly has a minimum repayment of $\$1,687$/month. The borrower pays $\$2,000$/month. (a) Find the new loan term in months using $n = \dfrac{-\ln(1 - Pr/M)}{\ln(1+r)}$. (b) How many years does this save? (3 marks)

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ApplyBand 43 marks

Q2. A $\$450,000$ loan at 5% p.a. has a minimum repayment of $\$2,414$/month. The borrower holds $60,000 in an offset account. (a) Find the effective loan balance. (b) Calculate the monthly interest saving. (c) Is this better than a savings account at 4% p.a. taxed at 32.5%? Show working. (3 marks)

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AnalyseBand 54 marks

Q3. A borrower has $\$350,000$ outstanding at 4.5% p.a. and $\$30,000$ to allocate to debt reduction. Compare the mathematical effect of: (a) placing $\$30,000$ in an offset account, and (b) making a single $\$30,000$ lump-sum extra repayment. Which strategy is more flexible and why? (4 marks)

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Comprehensive answers (click to reveal)

Drill answers:

1. Extra $\$300$: new monthly = $\$2,448$. $n = -\ln(1 - 400{,}000 \times 0.004167 / 2{,}448) / \ln(1.004167) \approx 288$ months = 24 years. Saves 6 years.

2. Extra $\$500$: new monthly = $\$2,648$. $n \approx 246$ months = 20.5 years. Interest = $2,648 \times 246 = \$651{,}408$. Minimum total = $2,148 \times 360 = \$773{,}280$. Saved $\approx \$121{,}872 \approx \$135{,}000$ (table-rounded).

3. Effective balance $= \$350{,}000$. Monthly saving $= 50{,}000 \times 0.004167 = \$208.35/\text{month}$.

4. Offset: 5% guaranteed, tax-free. Savings: $4\% \times (1 - 0.325) = 2.7\%$. Offset is superior by 2.3 percentage points.

Q1 (3 marks): $r = 0.054/12 = 0.0045$ [1]. $n = -\ln(1 - 300{,}000 \times 0.0045/2{,}000)/\ln(1.0045) = 199$ months $\approx 16.6$ years [2]. Saves $30 - 16.6 = 13.4$ years [1].

Q2 (3 marks): (a) Effective $= 450{,}000 - 60{,}000 = \$390{,}000$ [1]. (b) Saved $= 60{,}000 \times (0.05/12) = \$250$/month [1]. (c) After-tax savings $= 4\% \times 0.675 = 2.7\%$. Offset earns 5%, so offset is far better [1].

Q3 (4 marks): Both reduce interest by the same monthly amount: $30{,}000 \times 0.045/12 = \$112.50$/month [1]. Offset: $350{,}000 \to \$320{,}000$ effective. Same saving as lump sum [1]. Difference: offset money is accessible instantly; lump sum goes into loan permanently (recoverable via redraw only if facility exists) [1]. Offset is more flexible for emergencies but may carry an annual fee [1].