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 save you significant interest over the life of your loan, but they work differently, they are treated differently by the ATO, and the wrong choice can cost you thousands — particularly if you own investment property. This guide breaks down exactly how each feature works, when to use which, and the tax trap 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 your offset account, you are only charged interest on $450,000. Your repayments stay the same, but 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 entirely yours. You can deposit into it, withdraw from it, and use it for everyday transactions just like any other bank account. There is no restriction on access, and the funds are never 'absorbed' into the loan. This is a 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. Most lenders offer redraw at no additional cost, but some impose minimum redraw amounts, processing times, or fees. Access is not always instant, and some lenders can restrict or remove redraw functionality at their discretion.
If you own or plan to own an investment property, the choice between offset and redraw is not just a convenience question — it has direct tax consequences. The ATO looks at the purpose 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 redrawn portion of the loan is no longer considered to have been borrowed for an investment purpose. This means the interest on that redrawn amount is not tax-deductible.
An offset account avoids this problem entirely. Because the money was never paid into the loan — it simply sat alongside it — withdrawing funds from your offset account does not change the loan's purpose. The full loan balance remains investment-related, and the interest remains fully deductible. This is why most experienced brokers and accountants recommend offset accounts for investment property loans.
If you currently have an investment loan with a redraw balance, do not redraw those funds for personal use. Speak to your accountant and broker first — it may be worth restructuring your facilities to avoid an adverse tax outcome.
Not all offset accounts are created equal. 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 significantly reduces the benefit. Always confirm your offset is 100% before relying on it as a savings strategy. Most major bank and non-bank lenders now offer 100% offset as standard on variable rate loans, but it is worth checking, particularly on fixed rate products where offset is less commonly available.
The best approach depends on your personal circumstances, your property portfolio, and your future plans. At Pendium Finance, we structure every loan with these considerations in mind — not just the rate, but the features and flexibility that will serve you over the life of the facility. If you are unsure whether your current loan structure is working for you, we are happy to review it and recommend adjustments where appropriate.
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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