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Offset Account vs Redraw: Which is Right for You?
By James Alexander · 2026-01-20T00:00:00+11:00 · 7 min read
Understand the real differences between offset accounts and redraw facilities — how they work, tax implications for investors, and which suits your situation.
Offset accounts and redraw facilities are two of the most commonly discussed home loan features in Australia, yet the difference between them is widely misunderstood. Both can reduce the interest you pay over the life of your loan, but they work differently, they can be treated differently for tax purposes, and the wrong choice can be costly — particularly if you own, or later rent out, a property. This guide explains how each feature works, when each tends to suit, and the tax issue that catches many borrowers off guard.
An offset account is a transaction account linked to your home loan. The balance in the offset account is deducted from your outstanding loan balance when the lender calculates interest. For example, if you have a $500,000 loan and $50,000 sitting in a 100% offset account, you are only charged interest on $450,000. If your repayments stay the same, more of each repayment goes toward principal rather than interest, which means you pay off the loan faster.
The money in the offset account remains yours. You can deposit into it, withdraw from it, and use it for everyday transactions like any other bank account, subject to the account's terms. The funds are not paid into the loan. This is the critical distinction from redraw.
A redraw facility allows you to make additional repayments on your home loan above the minimum required amount, then withdraw (redraw) those extra funds later if needed. For example, if your minimum monthly repayment is $2,500 and you pay $3,500 each month, you build up $1,000 per month in redrawable funds. Like an offset account, the extra repayments reduce the balance on which interest is calculated.
The key difference is that redrawn funds are not sitting in a separate account — they have been paid into your loan. When you redraw, the lender is effectively re-advancing you money from the loan. Many lenders offer redraw at no additional cost, but some impose minimum redraw amounts, processing times, or fees. Access is not always instant, and lenders can generally restrict or remove redraw availability under the loan terms.
If you own or plan to own an investment property, the choice between offset and redraw is not just a convenience question — it can have tax consequences. The ATO looks at the use of borrowed funds to determine whether loan interest is tax-deductible. When you redraw from a loan and use those funds for personal purposes (such as a holiday or a new car), the interest on the redrawn portion is generally not deductible, even if the original loan was for an investment.
An offset account works differently. Because the money was never paid into the loan, withdrawing funds from your offset account does not by itself change the purpose of the loan. This matters most where a home you live in may later become an investment property: keeping savings in an offset rather than paying down the loan preserves the loan balance, and the interest on that balance may then be deductible once the property is rented out. Where you hold both a home loan and an investment loan, surplus cash is often better directed against the non-deductible home loan. The right structure depends on your circumstances, so confirm it with a registered tax agent.
If you currently have an investment loan with a redraw balance, speak to your tax agent before redrawing those funds for personal use. It may be worth reviewing your loan structure first.
Not all offset accounts are the same. A 100% offset account reduces your loan balance dollar-for-dollar — $50,000 in the account offsets $50,000 of your loan. A partial offset might only offset a percentage, say 40% or 60%, which reduces the benefit. Confirm your offset is 100% before relying on it as a savings strategy. Many lenders offer 100% offset on variable rate loans, often as part of a package with an annual fee, but it is less commonly available on fixed rate products.
The best approach depends on your circumstances, your property plans, and your tax position. When we provide regulated mortgage-broking assistance, the best interests duty requires us to act in your best interests — which means looking at features, fees and flexibility, not just the headline rate. If you are unsure whether your current loan structure still suits you, we can review it with you; tax questions should go to your registered tax agent.
This article is general information only. It does not constitute financial, legal, or taxation advice and does not take into account your personal objectives, financial situation, or needs. You should consider seeking independent advice before making any financial decisions. Pendium Finance Pty Ltd (Credit Representative 543457) is authorised under LMG Broker Services Pty Ltd (Australian Credit Licence 517192) and provides credit assistance, not personal financial advice.
Written by James Alexander, Director at Pendium Finance — more about the team.
Tags: offset account, redraw facility, home loan features, investment property tax, mortgage strategy
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Pendium Finance Pty Ltd (ACN 662 388 838) — Credit Representative 543457, authorised under LMG Broker Services Pty Ltd (Australian Credit Licence 517192).