Two of the most common home loan features in Australia — offset accounts and redraw facilities — can both reduce your interest bill, but they work differently and have meaningful tax implications, particularly for property investors. Understanding the distinction can save you thousands of dollars and prevent costly tax mistakes.
How an Offset Account Works
An offset account is a separate bank account (usually a transaction account) linked to your home loan. The balance in this account is “offset” against your loan balance daily, so you only pay interest on the net amount.
Example: You have a $700,000 home loan and $50,000 in your offset account. You pay interest on $650,000 — not $700,000. At 6.5% per annum, this saves you approximately $3,250 per year in interest.
Key features of offset accounts:
- The money in the offset account remains yours — it is not applied to the loan
- You can deposit and withdraw freely (subject to normal account terms)
- The offset account has its own BSB and account number
- Most offset accounts are linked to variable rate loans; some lenders offer partial offset on fixed rate loans
How a Redraw Facility Works
A redraw facility allows you to make additional repayments above the minimum required, and then “redraw” those extra funds if you need them later. The extra repayments reduce your loan balance and therefore the interest you pay — but the money is technically held within the loan account, not a separate account.
Example: You have a $700,000 loan and have made $50,000 in extra repayments, bringing your balance to $650,000. You pay interest on $650,000. If you need $20,000, you can redraw it — but your loan balance returns to $670,000 and your interest charges increase accordingly.
Key features of redraw facilities:
- Extra repayments are applied directly to the loan balance
- Redraw is at the lender’s discretion — some lenders can restrict or suspend redraw access (particularly during market stress)
- Minimum redraw amounts may apply (e.g., $500 or $1,000)
- Some lenders charge fees for redrawing
The Critical Tax Difference for Investors
This is where the offset vs redraw distinction becomes crucial — and getting it wrong is one of the most common (and costly) mistakes property investors make.
The “Contamination” Problem with Redraw
If you have an investment property loan and you redraw funds from it to use for private purposes (a holiday, a car, personal expenses), the Australian Taxation Office (ATO) takes the position that the redrawn amount is no longer borrowing for investment purposes. This means the interest attributable to the redrawn funds may no longer be tax deductible.
Once a loan becomes “mixed” (partly investment, partly private), apportioning the deductible interest is complex and may require ATO guidance.
Offset Accounts Preserve Deductibility
With an offset account, funds in the account are separate from the loan itself. The full loan balance remains an investment borrowing — the offset account balance simply reduces the interest charged on that full balance. Using funds from your offset account for private purposes does not affect the tax deductibility of the investment loan interest.
This is why most tax-conscious property investors use offset accounts rather than redraw for their investment loans.
Access and Flexibility Differences
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| Access to funds | Immediate, like a bank account | Requires a redraw request, may have delays |
| Minimum withdrawal | Usually none | Often $500–$1,000 |
| Lender control | Funds are yours | Lender may restrict access |
| Fees | May include account-keeping fees | Some lenders charge per redraw |
| Tax implications | No contamination risk | Risk if used for private purposes |
When to Use Each
Use an Offset Account When:
- You have an investment property loan and want to maintain full tax deductibility
- You need frequent or immediate access to funds
- You receive salary into the account to maximise the daily offset balance
- You have an owner-occupier loan and want maximum flexibility
Use Redraw When:
- Your loan (usually a basic/no-frills loan) doesn’t offer an offset account
- You have surplus funds that you’re confident you won’t need for private purposes
- The interest rate saving from a lower-rate loan without offset outweighs the flexibility benefit
Frequently Asked Questions
Which is better for investors — offset or redraw?
For investment property loans, an offset account is almost always preferable. Funds in an offset account never touch the loan, so the full loan balance remains a deductible investment borrowing regardless of how you use the offset funds. Using redraw from an investment loan for private purposes risks “contaminating” the loan, potentially making some interest non-deductible. This is a widely misunderstood issue — consult your accountant and mortgage broker before redrawing from an investment loan.
Does redrawing from my home loan affect my tax deductions?
For an owner-occupier home loan, the interest is not deductible anyway — so redraw does not create a tax issue. However, if you later convert your home to an investment property (e.g., rent it out and buy another home to live in), the deductibility of interest on the remaining loan balance may be affected by any previous redraws. This is a complex area of tax law — seek advice from a tax professional before converting a property from owner-occupier to investment use.
Can I have both an offset account and a redraw facility?
Yes. Some loans include both features. In practice, most borrowers use one or the other. If your loan has both, the offset account is typically the better vehicle for liquid savings (especially for investment loans). Redraw is generally used as a secondary access point for extra repayments accumulated over time. Your mortgage broker can structure your loan to include the features that best match your strategy.
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About the Author
Victor Lagos is a licensed mortgage broker (ACL 546774) and founder of Lagos Financial, with close to 20 years of finance industry experience since beginning his career at Bluestone Mortgages in 2006. A member of the Finance Brokers Association of Australia (FBAA) since 2015 and the Australian Financial Complaints Authority (AFCA — 98399), Victor helps Australians build wealth through tailored home loan and property investment strategies, working with 60+ lenders nationwide. Last reviewed: March 2026.