Ask most homeowners to explain the difference between an offset account and a redraw facility, and you’ll usually get a shrug. Both let you put extra money towards your mortgage. Both reduce the interest you pay. Both seem like the financially responsible choice.
So why would a bank or an accountant care which one you use?
Because the two only appear to work the same while your money stays where it is. The moment you withdraw those funds, they behave very differently. If you own an investment property, or might convert your home into a rental in the future, choosing the wrong option could quietly cost you thousands in lost tax deductions.
Here’s the difference in simple terms, along with a real-world example.
What Is a Redraw Facility?
A redraw facility isn’t a separate account. It’s simply a feature attached to your home loan.
Every extra repayment you make above the minimum repayment goes directly towards reducing your loan balance. Because your loan balance is lower, you’re charged less interest from that point onwards.
However, if you later want to access those extra repayments, you must request a redraw from your lender.
While processing times vary between banks, the Australian Taxation Office (ATO) has a clear position. Under Taxation Ruling TR 2000/2, withdrawing money from redraw is treated as a new borrowing, not simply getting your own savings back, regardless of what the loan was originally used for.
What Is an Offset Account?
An offset account is a normal transaction account linked to your home loan.
You can deposit money, pay bills, transfer funds and use it just like any everyday bank account. The balance sitting in the account reduces the amount of your home loan that interest is calculated on.
For example:
- Home loan balance: $500,000
- Offset account balance: $50,000
You’ll only pay interest on $450,000.
The interest saving is the same as making an extra repayment through redraw. The important difference is that your loan balance never changes. Your money remains your savings.
Before switching, it’s worth checking your lender’s fees. Some lenders include offset accounts as part of a package with an annual fee, while others charge a slightly higher interest rate for loans with an offset account attached.
Although the difference is usually small, it’s worth reviewing your loan terms rather than assuming an offset account is free.
Where the Difference Really Matters
This is where many borrowers get caught out.
If you withdraw money from your offset account, nothing changes about your home loan. You’re simply moving your own savings between bank accounts.
If you withdraw money from redraw, however, the ATO treats that withdrawal as a new loan.
The next question becomes:
What was the money used for?
- If it was used for an income-producing investment, the interest on that portion of the loan will generally remain deductible.
- If it was used for personal purposes, such as renovating your home, buying a car, taking a holiday or paying personal expenses, that portion of the loan generally stops being tax deductible.
This applies even if the loan itself is secured against an investment property.
Real-World Example
Imagine a couple purchased an investment property several years ago with a $400,000 loan.
Over time, they’ve made extra repayments and built up $60,000 available in redraw.
They now decide to renovate their own home and redraw that $60,000 to pay the builder.
At first glance, nothing seems different.
- Same investment loan
- Same lender
- Same account number
- Same monthly repayments
However, from a tax perspective, the investment loan has now become a mixed-purpose loan.
It effectively consists of:
- $340,000 investment debt (interest generally remains deductible)
- $60,000 personal debt (interest generally isn’t deductible)
At tax time, their accountant now has to apportion the interest between the deductible and non-deductible portions every year.
Importantly, repaying that $60,000 later doesn’t undo the problem.
The ATO looks at how the borrowed funds were used when they were withdrawn, not whether you later paid the money back into the loan. Once that portion becomes private debt, it generally retains that character.
If the same $60,000 had been sitting in an offset account instead, they could have transferred it to pay for the renovation without affecting the investment loan or its tax deductibility.
This isn’t simply lender policy or accounting practice. It comes directly from Taxation Ruling TR 2000/2, which explains how interest deductibility applies to redraw and line-of-credit facilities.
Offset vs Redraw: At a Glance
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| What it is | A separate bank account linked to your home loan. | A feature built into your home loan. |
| How it saves interest | Interest is charged on the loan balance minus the offset balance. | Extra repayments reduce the loan balance directly. |
| Access to funds | Instant transfer, just like a normal bank account. | Request a redraw from your lender (timing varies). |
| ATO treatment when money is withdrawn | Not considered a new borrowing. | Treated as a new borrowing. |
| Effect on tax deductibility | No change. The loan purpose remains the same. | Depends entirely on how the redrawn funds are used. |
| Can it be reversed by repaying the money? | Not applicable. | No. The purpose is determined when the funds are borrowed. |
| Best suited for | Borrowers wanting flexibility, especially if a property may become an investment. | Money you’re confident you won’t need to access again. |
| Typical fees | Some lenders charge package fees or slightly higher interest rates. | Usually free, although some lenders may charge a small redraw fee. |
So Which One Should You Choose?
Here are a few practical guidelines.
- If there’s any possibility your home could become an investment property in the future, an offset account usually provides greater flexibility and helps preserve future tax deductions.
- If you’re confident you’ll never need to access your extra repayments, a redraw facility can work just as well and often comes with lower costs.
- If you’re unsure, an offset account is generally the safer option. A small annual fee or slightly higher interest rate is often insignificant compared with the long-term tax consequences of creating a mixed-purpose loan.
- Many borrowers use both: an offset account for money they may need later, and redraw for repayments they’re comfortable leaving in the loan permanently.
The key isn’t deciding that one feature is always better than the other. It’s understanding where your money sits and what happens if you need to access it.
Final Thoughts
A single redraw can turn a straightforward investment loan into a mixed-purpose loan, making your tax deductions far more complicated for years to come.
Before using redraw to access large amounts of money, think carefully about what the funds will be used for. That decision could save significant time, money and accounting complexity later.
Every borrowing situation is different. Before making major changes to your loan, speak with your accountant or lender so you understand the tax consequences for your circumstances.
If you’d like to see this explained step by step, watch our YouTube video where we walk through the same scenario and show you how to check whether your own home loan uses an offset account or a redraw facility.
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FAQs
What is the main difference between an offset account and a redraw facility?
An offset account is a separate bank account linked to your home loan, while a redraw facility allows you to access extra repayments you’ve made directly into your loan.
Can withdrawing money from redraw affect my tax deductions?
Yes. If you redraw funds and use them for personal expenses, that portion of the loan may no longer be tax deductible.
Is money in an offset account treated differently for tax purposes?
Yes. Because the money remains separate from your loan, withdrawing it generally doesn’t change the purpose of the loan or affect its tax deductibility.
Which is better for an investment property loan: offset or redraw?
An offset account generally provides greater flexibility and helps avoid mixing personal and investment debt. However, the right option depends on your financial circumstances and future plans.
