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    Offset Account vs Redraw

    Two ways to reduce mortgage interest, with very different legal implications

    What is Offset Account vs Redraw?

    Both an offset account and a redraw facility reduce the interest you pay on your home loan. But they work differently and have different implications, especially if you later convert your home to an investment property. Choosing wrong can cost you thousands in lost tax deductions.

    How it works

    1. 1Offset: a separate transaction account linked to your loan. Your balance reduces the loan balance for interest calculation. The money is yours, it's not inside the loan.
    2. 2Redraw: extra repayments you've made on the loan. The money is inside the loan. You can redraw it, but it is treated as new borrowing.
    3. 3Both save the same interest day-to-day IF the balance is the same.
    4. 4The difference matters if you later borrow (redraw) for non-investment purposes.

    Worked example

    Home loan: $500,000. You have $80,000 of spare cash.
Offset: $80,000 in the offset account means interest on $420,000. The loan balance stays $500,000, so if the home later becomes an investment, interest on the full $500,000 can be deductible.
Redraw: $80,000 as extra repayments also means interest on $420,000. Redraw $80,000 later for a car and the loan now mixes purposes: only interest on the investment portion is deductible.
Result: an offset keeps the loan's purpose clean; redraw can mix it.

    Pros

    • Offset: full flexibility, no impact on loan purpose for tax
    • Redraw: slightly lower fees at some lenders (some don't offer both)
    • Both: save daily interest, significant over a 30-year loan

    Cons

    • Redraw: redrawn funds are new borrowing, interest deductibility depends on purpose of redraw
    • Offset: accounts at some lenders have monthly fees
    • Neither: discipline required, savings can be too accessible

    Risks

    • Critical risk: if you use redraw for personal purposes (renovations, car) on what becomes an investment loan, you permanently reduce the deductible portion
    • Contaminated loans cannot be "uncleaned", keep investment and personal borrowings strictly separate

    Tax treatment

    Offset: funds sit outside the loan, no tax event. Loan remains unchanged for purpose test. Deductibility preserved if property later becomes investment. Redraw: redrawn funds are treated as new borrowing at the date of redraw. ATO purpose test applied, if redrawn for private purposes, interest on that amount is NOT deductible. ATO ruling: TR 2000/2.

    Official references

    Keep exploring

    Repayments Calculator Read property guides on the blog All strategies

    General Advice Warning

    The information on this site is general in nature and does not consider your personal circumstances, financial situation, or needs. Before acting on any information, you should consider its appropriateness having regard to your own situation and seek professional advice from a licensed financial adviser, mortgage broker, accountant, or solicitor.