The offset account versus redraw debate is one of the most practically important (and most frequently misunderstood) decisions in Australian investment property finance. Most borrowers treat them as interchangeable, because from a pure interest-saving perspective, they work identically. But for investors who own or plan to own investment property, they are emphatically not interchangeable. Getting this wrong can cost tens of thousands of dollars in lost tax deductions over a typical property investment holding period.
How Each Structure Works
Offset Account
An offset account is a separate transaction account linked to your mortgage. The balance in the offset account reduces the principal balance on which interest is calculated: but the money in the offset account remains your money, sitting separately from the loan. You can deposit and withdraw at any time. The loan balance itself does not change when you deposit to or withdraw from the offset account.
Example: $500,000 mortgage. $80,000 in offset account. Interest is calculated on $420,000 (the loan balance minus the offset balance). If you withdraw the $80,000, interest reverts to being calculated on $500,000. The loan balance was always $500,000.
Redraw Facility
A redraw facility allows you to make extra repayments on your mortgage (above the minimum required repayment), reducing the loan balance: and then redraw those extra repayments later if needed. When you make extra repayments with a redraw facility, the loan balance actually decreases. When you redraw, the loan balance increases again.
Example: $500,000 mortgage. You make $80,000 in extra repayments: loan balance is now $420,000. Interest is calculated on $420,000. If you redraw the $80,000, the loan balance returns to $500,000.
Functionally identical for interest saving purposes. Critically different for tax purposes.
Why This Matters Enormously for Property Investors
Offset vs Redraw: The Investor Comparison
This is a general framework: consult a tax advisor for your specific situation.
The ATO’s Position on Redraw: and Why It Can Cost You
The ATO’s position on deductible interest is principled around one concept: the purpose of the borrowing. Interest on a loan is deductible when the borrowed funds are used to produce assessable income: for example, to purchase an income-producing investment property.
When you make extra repayments on a loan, you reduce the loan balance. When you later redraw those extra repayments, you are re-borrowing. The ATO’s view: the deductibility of the redrawn funds depends on what you use them for: not what the original loan was for.
This creates a significant problem in the most common investor scenario:
- You own your home (non-deductible loan) and make extra repayments
- You later convert the home to a rental property and redraw those extra repayments to use as spending money, holiday, or personal expenses
- The redrawn funds were used for a personal purpose: they are not deductible
- Your loan balance is now higher, but only the portion attributable to the original investment purchase is deductible: not the redrawn portion
With an offset account, this problem does not arise. The offset account balance is always your separate money: withdrawing it does not change the loan balance or its purpose. The loan remains the original investment loan amount, and interest on it remains fully deductible.
The Classic Contamination Scenario
Here’s the scenario that plays out constantly among Australian investors, often without them realising the tax consequence:
An investor owns their home with a $600,000 mortgage and has made $120,000 in extra repayments using a redraw facility. Their loan balance is now $480,000. They decide to rent out their home and move into a rental themselves (rentvesting).
Before renting it out, they redraw $60,000 to fund a holiday and a car. Their loan balance is now $540,000.
The ATO’s position: only the interest on $480,000 is deductible (the loan balance at the point the property became an investment property). The extra $60,000 redrawn for personal use is not deductible: it was borrowed for a personal purpose.
Had they used an offset account instead of the redraw facility, the $60,000 withdrawn from the offset account would not have changed the loan balance at all. The loan would have remained $480,000 (the balance at the point the property became investment), with interest fully deductible. Additionally, the $120,000 in the offset account could have been withdrawn freely without any tax consequence.
When You Have Both. Home + Investment Property
The standard advice for property investors holding both an owner-occupied mortgage (non-deductible) and an investment mortgage (deductible) is clear:
- Owner-occupied loan: Use an offset account. Keep savings in the offset to reduce non-deductible interest. If you need the cash later, withdraw it: the owner-occupied loan balance and deductibility are unaffected.
- Investment loan: Generally interest-only. Don’t make extra repayments: the interest is deductible, so there’s limited tax benefit to reducing the balance. Keep extra cash in the owner-occupied offset instead, where it reduces non-deductible interest.
This strategy (sometimes called debt recycling) maximises deductible interest and minimises non-deductible interest simultaneously. It requires an offset account on the owner-occupied loan, not a redraw facility.
Practical Considerations
Lender Access to Redraw
Some lenders reserve the right to restrict redraw access: particularly during periods of financial hardship or if the loan goes into arrears. Offset account funds are yours; the lender cannot restrict your access to them in the same way. This is a meaningful difference for investors who want liquidity certainty.
Cost of Offset Accounts
Many offset account products charge a monthly fee ($5–15/month) or require a package loan (with annual fee of $300–400/year). The tax and flexibility benefit usually outweighs this for investors: but factor it into your comparison when choosing a loan product.
Partial Offset Accounts
Some lenders offer partial offset accounts (where only a percentage of the offset balance offsets the loan). These are less common but worth identifying: a 40% partial offset is significantly less valuable than a 100% offset. Always confirm full 100% offset before assuming.
Frequently Asked Questions. Offset Account vs Redraw Investment Property
Why does the ATO care whether I use an offset or redraw?
Because redrawing from a loan means re-borrowing: and the ATO assesses deductibility based on the purpose of the new borrowing, not the original loan. Funds redrawn for personal use are not deductible, even if the original loan was investment-related. Offset account withdrawals don’t change the loan balance or purpose at all.
What’s the best structure for an investor with both a home and an investment property?
Offset account on the owner-occupied (non-deductible) loan: park all savings there to reduce non-deductible interest. Interest-only investment loan: don’t make extra repayments, since the interest is deductible and reducing it provides limited benefit. This combination maximises deductible interest and minimises non-deductible interest simultaneously.
The offset versus redraw distinction is one of those structural decisions that feels trivial when you make it and becomes very significant when you need the cash and discover the tax consequences. Setting it up correctly at the beginning (offset on the home loan, not a redraw) is far simpler than unwinding the contamination later.
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General Advice Warning: This article is general in nature and does not constitute personal financial advice. Please consult a licensed financial adviser before making investment decisions.
