Both offset accounts and redraw facilities reduce your home loan interest — but they work differently, have different tax implications for investors, and suit different situations. This guide compares both with worked dollar examples.
An offset account is a transaction account linked to your home loan. The balance held in the offset account is subtracted from your loan balance before daily interest is calculated. Your money remains yours — fully accessible, just like any bank account — but while it sits there, it reduces the interest accruing on your loan.
Loan balance: $600,000 | Interest rate: 6.5% p.a. | Offset account balance: $50,000
| Scenario | Balance Interest is Charged On | Daily Interest | Annual Interest |
|---|---|---|---|
| No offset | $600,000 | $106.85 | $39,000 |
| $50,000 in offset | $550,000 | $97.95 | $35,750 |
| Annual saving | — | $8.90/day | $3,250/year |
The $50,000 in the offset saves $3,250 per year in interest — equivalent to a guaranteed 6.5% return on those funds, tax-free for owner-occupiers. As the loan balance reduces over time and the offset balance grows (or stays steady), this saving compounds.
A redraw facility allows you to make extra repayments directly into your home loan above the minimum required amount, and then access those extra funds later by "redrawing" them. Unlike an offset account, the extra money you pay into redraw is technically applied directly to your loan principal — reducing the outstanding balance and therefore the interest charged.
The interest saving is immediate and real: every dollar of extra repayment reduces the balance on which interest is calculated, exactly like an offset account. The difference is that the money is part of the loan, not a separate linked account. To access it, you must formally request a redraw, which may take 1–3 business days and may have minimum redraw amounts or fees depending on the lender.
Yes — mathematically, the interest saving from holding $50,000 in an offset account versus making $50,000 in extra repayments into redraw is identical, assuming the same loan balance, interest rate, and that you don't touch the funds in either case.
The differences are practical rather than mathematical:
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| Access to funds | Immediate — works like a bank account | Requires redraw request; may take days |
| Minimum balance restrictions | Usually none | Minimum redraw amounts sometimes apply |
| Available on fixed rates? | Rarely — mainly variable | Sometimes available on fixed rates |
| Annual fee | Often $300–$400/year (package loans) | Usually no separate fee |
| Tax implications (investors) | Money stays outside the loan — no deductibility risk | Redrawing for non-investment use can affect deductibility |
For property investors — or owner-occupiers who might later convert their home to a rental — the choice between offset and redraw has significant tax implications that can cost tens of thousands of dollars if handled incorrectly.
When you make extra repayments into your home loan and then redraw those funds for a personal (non-investment) purpose — such as buying a car, renovating your home, or going on holiday — the ATO may view the loan as no longer "for the purpose of producing assessable income" to the extent of that redraw. This can reduce or eliminate the tax deductibility of the interest on that portion of the loan.
This is sometimes called "loan contamination" or "mixed-purpose borrowing." It is a genuine risk that catches many investors who convert their home to a rental property without careful planning.
Because offset account funds are technically separate from the loan — held in a linked bank account, not applied to the loan principal — withdrawing money from your offset account for personal use does not change the loan's tax deductibility. The loan purpose remains unchanged.
The right choice depends primarily on your situation:
Enter your loan amount, interest rate, and offset balance to calculate annual interest savings.
Open Mortgage Calculator →The interest saving may be equivalent, but the legal character of the two facilities is not, and that difference emerges precisely when you need the money.
Money in an offset account is your money, sitting in a transaction account. It reduces the balance on which interest is calculated, but it remains yours to withdraw.
Money paid into a loan via extra repayments has been paid to the lender. Redraw is a facility the lender offers allowing you to access it again — and facilities have terms. Lenders have, in practice, reduced redraw limits, suspended redraw access, or recalculated available redraw during periods of stress. Some loan contracts permit the lender to reduce or withdraw redraw at their discretion.
Interest is generally deductible where borrowed funds are used to produce assessable income. The deductibility is determined by the use of the borrowed funds, not by the security offered.
Suppose you have a home loan with $50,000 in extra repayments, and you later decide to keep the property as a rental and buy a new home.
If that $50,000 sat in an offset account, you simply withdraw it. The loan balance is unchanged, and the full loan continues to relate to the investment property. The interest remains deductible.
If that $50,000 was paid into the loan and you redraw it, you have borrowed $50,000 afresh. The deductibility of the interest on that redrawn amount depends on what you use it for — and using it to buy a private residence means that portion of the interest is generally not deductible. You now have a single loan with a mixed purpose, and apportioning it is an ongoing complication.
Mixed-purpose loans are difficult to unwind and difficult to administer. This is the reason many advisers suggest an offset account where a property might ever become an investment.
Offset accounts commonly attract a higher interest rate, an annual package fee, or both. Where the offset balance is small, the fee can exceed the interest saved.
If you have no intention of ever converting the property to an investment, are unlikely to need the funds at short notice, and the offset carries a fee premium, redraw on a basic loan may genuinely be the cheaper option.
This page provides general information only and is not financial or tax advice. Deductibility depends on the use of borrowed funds and is fact-specific — speak with a registered tax agent before restructuring a loan, and a mortgage broker or your lender about the facility itself.
Can I have both an offset account and a redraw facility?
Yes. Some home loan products include both features, though not all lenders offer this combination. You might, for example, hold your emergency fund in the offset account while also making periodic extra repayments via the loan itself. Whether this makes sense depends on your specific loan structure and the fees involved.
Is the interest saving from an offset account taxable?
For owner-occupiers, the interest saving from an offset account is not taxed — it is simply a reduction in interest paid, not income earned. For investors, this is different: the interest on the investment loan (net of offset benefit) is deductible, so the tax treatment depends on the investment loan structure. Always discuss with your tax agent.
What is a partial offset account?
A partial offset only offsets a proportion of your account balance against the loan — for example, a 50% partial offset means $50,000 in the account offsets only $25,000 against the loan. Full (100%) offset accounts are standard with most major lenders. Always confirm whether your offset is full or partial when comparing products.
Does salary crediting help with offset accounts?
Yes — having your salary paid directly into your offset account means your full salary reduces the loan balance for interest calculation immediately after each pay cycle, even if you spend it gradually over the following fortnight. This practice — sometimes called "parking salary in offset" — maximises the daily offset benefit with no additional effort.
Illustrative. The total repayment is unchanged; only the split between interest and principal moves, which is why early extra repayments remove disproportionate interest.