How an Offset Account Works
An offset account is a transaction account linked to your home loan, where the balance reduces the amount of interest you are charged each day. It functions like a normal everyday bank account: you can deposit your salary, pay bills, use a debit card and withdraw funds freely. The difference is that instead of earning interest on the balance, the balance is offset against your loan, reducing the interest charged.
For example, if you have a $500,000 home loan and $50,000 sitting in your offset account, interest is only charged on $450,000. You save the same amount of interest as if you had made a $50,000 lump sum repayment, but you retain full access to the $50,000 at all times.
Most offset accounts are 100% offset, meaning every dollar in the account reduces your loan interest dollar for dollar. Some lenders offer partial offset accounts (where only a percentage of the balance offsets the loan), but these are less common and generally less beneficial.
How a Redraw Facility Works
A redraw facility allows you to withdraw extra repayments you have made on your home loan above the minimum required amount. If your minimum monthly repayment is $3,000 and you pay $3,500 each month, the extra $500 goes directly into the loan, reducing your balance. After 12 months, you would have $6,000 in extra repayments available to redraw.
The key distinction is that with redraw, the extra funds are inside the loan itself, reducing your loan balance. When you redraw, you are effectively re-borrowing that money from the loan. This has important implications for tax treatment, which is covered below.
Redraw policies vary by lender. Some allow unlimited free redraws, while others charge a fee per transaction or set a minimum redraw amount (for example, $500). Some lenders also reserve the right to restrict or delay redraw access, particularly on fixed rate loans.
Side by Side Comparison
The practical differences between offset and redraw come down to accessibility, fees, tax treatment and how each interacts with your loan balance.
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| How it works | Separate account; balance offsets loan interest | Extra repayments sit inside the loan; can be withdrawn |
| Interest saving | Yes, dollar for dollar | Yes, dollar for dollar |
| Accessibility | Full transaction account (debit card, BPAY, transfers) | Withdraw via app or branch; may have minimum amounts |
| Fees | Often $10-$15/month or included in package | Usually free or low cost |
| Tax treatment (investment) | Loan balance unchanged; interest fully deductible | Redrawing may create a new borrowing; interest may not be deductible |
| Flexibility | Use as everyday account; no impact on loan structure | Funds are part of the loan; withdrawing increases loan balance |
| Risk of lender restriction | None (it is your bank account) | Some lenders can restrict or delay access |
| Best for | Investors, those wanting full flexibility | Owner-occupiers wanting a simple, low-cost option |
Tax Implications for Investors
For investment property owners, the tax treatment of offset versus redraw is the single most important difference and can cost thousands of dollars in lost deductions. This is where many property investors make an expensive mistake.
Offset account: Your savings sit in a separate account. Your loan balance remains unchanged at, say, $500,000. All the interest charged on the $500,000 loan remains tax deductible because the loan purpose has not changed. Your savings are simply reducing the interest amount, not altering the loan itself.
Redraw facility: Your extra repayments reduce the loan balance directly. If you pay an extra $50,000 into the loan, the balance drops to $450,000. If you then redraw that $50,000 for personal use (a holiday, a car, renovating your own home), the ATO may treat the redrawn $50,000 as a new personal borrowing. Interest on that $50,000 portion would NOT be tax deductible, even though the underlying loan is for an investment property.
Example scenario: You have a $500,000 investment property loan. Over three years, you make $60,000 in extra repayments via redraw, reducing the balance to $440,000. You then redraw $60,000 to renovate your own home. The ATO now considers your loan as two parts: $440,000 for investment (deductible) and $60,000 for personal use (not deductible). You have permanently reduced your tax deductions on this loan.
Had you used an offset account instead, your loan balance would have stayed at $500,000 the entire time. You would withdraw $60,000 from your offset account (your own savings) for the renovation. The full $500,000 loan remains for investment purposes and all interest remains fully deductible.
If you own or plan to own an investment property, an offset account is almost always preferable to redraw for this reason. The tax consequences of using redraw incorrectly can cost thousands of dollars per year in lost deductions and are difficult to reverse.
Which One Should You Choose?
The right choice depends on whether you have an investment property, how you use your savings and whether the offset account fees are justified by your balance.
| Scenario | Recommended Option | Why |
|---|---|---|
| Owner-occupier with large savings | Offset account | Maximum flexibility; use as everyday account |
| Owner-occupier with small savings | Redraw facility | Avoids monthly offset fees that may outweigh savings |
| Investment property owner | Offset account | Protects tax deductibility of loan interest |
| Planning to convert home to investment | Offset account | Preserves loan purpose if property becomes a rental |
| Fixed rate loan | Redraw (if available) | Most fixed rate loans do not offer offset accounts |
For owner-occupiers, the decision is less critical because interest deductibility does not apply. In this case, both options deliver the same interest savings. The choice comes down to whether you value the transaction account flexibility of an offset (and are willing to pay the fees) or prefer the simplicity of redraw.
Can You Have Both?
Yes, many home loans offer both an offset account and a redraw facility, and using both strategically can be beneficial. A common approach is to use the offset account as your primary savings and everyday transaction account, maximising the daily interest offset. The redraw facility then serves as a secondary emergency reserve for funds you are unlikely to need but want available as a last resort.
If your lender offers both, there is no reason not to take advantage of redraw on top of your offset. Just be mindful of the tax implications discussed above if the loan is for an investment property. In that case, keep all your accessible savings in the offset and avoid making extra repayments into the loan via redraw.
Common Mistakes
The most costly mistakes involve investors using the wrong feature and borrowers paying fees for an offset account they do not fully utilise.
1. Investors using redraw instead of offset. This is the most expensive mistake on this list. If you own an investment property and use redraw for personal expenses, you may permanently lose tax deductions on the redrawn amount. Use an offset account for investment property loans.
2. Paying offset account fees on a loan too small to benefit. If your offset account charges $15 per month ($180 per year) and you only keep $5,000 in the account, your annual interest saving at 6% is roughly $300. The net benefit is modest. If your balance is very small, a free redraw facility may be more cost-effective.
3. Confusing offset and redraw. Some borrowers believe they are the same thing. They are not. Understanding the structural difference (separate account vs funds inside the loan) is essential, particularly for tax purposes.
4. Not maximising your offset balance. If you have an offset account but keep savings in a separate high-interest savings account earning 4.5%, you are typically worse off than putting those funds in the offset. The offset saves you interest at your loan rate (say 6%), which is almost always higher than what a savings account pays, and the offset saving is tax-free.
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