Offset Account vs Redraw: What's the Difference and Which Saves More?
If you have $80,000 sitting in a savings account earning 4.5% while paying 6.2% interest on your mortgage, you are losing 1.7% per year on that gap — roughly $1,360 per year after tax on $80,000. Both offset accounts and redraw facilities let you apply that money against your mortgage balance to reduce interest, but they are legally and structurally different. For property investors, choosing the wrong one can cost far more than the interest difference — it can wipe out years of tax deductions.
How an Offset Account Works
An offset account is a separate transaction account linked to your mortgage loan. The bank calculates your daily mortgage interest based on the outstanding loan balance minus the current balance in your offset account.
Example: You have a $600,000 mortgage at 6.20% and $70,000 in your offset account. Interest is calculated on $530,000, not $600,000. The interest saving is: $70,000 × 6.20% ÷ 365 = approximately $11.87 per day, or $4,332 per year.
Crucially, the money in the offset account is not inside the loan — it sits in a separate account that you own and control. You can withdraw it at any time, via bank transfer, ATM or EFTPOS, exactly like a normal transaction account. The loan balance itself does not change; only the interest calculation changes based on your offset balance on any given day.
Offset accounts are almost exclusively available on variable rate loans. If you are considering fixing your rate, you will almost certainly lose access to your offset account during the fixed term.
How a Redraw Facility Works
Redraw is different in a fundamental way: the money is inside the loan. When you make extra repayments above the scheduled minimum, those additional funds reduce your outstanding principal directly. The redraw facility allows you to pull that money back out later if you need it.
Example: Your minimum monthly repayment is $3,500 but you pay $4,500 each month. Over a year, you have made $12,000 in extra repayments. Your redraw balance is $12,000, which you could withdraw if needed.
Because the money is in the loan, it is actively reducing your outstanding principal — and therefore your ongoing interest — from the moment it goes in. An offset account achieves the same interest reduction, but the money technically sits outside the loan. The interest saving calculation is identical for the same dollar amount in either facility.
Access to redraw is theoretically at the lender's discretion. In practice, lenders almost never refuse a redraw request, and most allow instant online access. However, there have been isolated cases — particularly during the Global Financial Crisis — where lenders restricted redraw access. This risk, however small, does not exist with an offset account.
The Critical Tax Difference for Property Investors
This is where the offset vs redraw distinction becomes financially significant — potentially to the tune of tens of thousands of dollars in lost tax deductions.
When you have an investment property, the interest on the loan used to purchase that property is tax-deductible. The ATO's position on loan purpose is clear: deductibility follows the purpose for which the borrowed funds were used. If you borrow money to buy an investment property, the interest is deductible. If you borrow money for private purposes (a car, holiday, home renovations), the interest is not deductible.
The redraw trap: Suppose you have an investment property loan and you have made $100,000 in extra repayments over the years, all sitting in redraw. One day you redraw $40,000 to renovate your family home (a private purpose). At that moment, $40,000 of your investment loan has been re-borrowed for private purposes. The ATO treats this as a mixed-purpose loan — the interest on $40,000 is no longer deductible.
The loan cannot be simply "separated" back into investment-purpose and private-purpose portions without a formal split. Your accountant must apportion interest deductions going forward — and the proportion gets more complicated with every further repayment and redraw. This problem compounds over years and can cost thousands in lost deductions.
The offset solution: With an offset account, the $40,000 for your home renovation sits in a separate account — not in the loan. When you transfer it out to pay for renovations, the loan balance is unchanged and remains 100% investment-purpose. There is no contamination of the loan's deductibility, because the loan itself never changed.
The ATO confirmed this distinction explicitly in a 2022 guidance update. An offset account does not change the loan balance or the purpose for which the loan was drawn down. Money in an offset account is the borrower's asset, not part of the loan.
Feature Comparison: Offset vs Redraw
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| Interest saving method | Daily balance reduces interest calculation | Extra repayments reduce principal directly |
| Money location | Separate account (outside loan) | Inside the loan |
| Access to funds | Instant — ATM, EFTPOS, online | Online (usually instant); lender discretion applies |
| Available on fixed rates | Rarely | Sometimes (capped extra repayments) |
| Safe for investment loans | Yes — no deductibility risk | Risk if redraw used for private purposes |
| Tax on interest earned | No — reduces interest rather than earning it | No — reduces interest rather than earning it |
| Fees | Some lenders charge monthly offset fee ($5–$10/mth) | Usually free; small redraw fee at some lenders |
| Counts toward loan term reduction | No (principal unchanged) | Yes (principal reduced directly) |
Interest Saving Comparison: Same Amount, Same Result
For an owner-occupier (who has no tax deductibility concerns), the interest saving from $80,000 in an offset account versus $80,000 in extra repayments via redraw is mathematically identical on any given day — assuming the loan balance and rate are the same.
At 6.20% annual rate: $80,000 × 6.20% = $4,960 per year in interest saved. This is the same whether that $80,000 is in an offset account or has reduced the principal via redraw.
The practical difference for owner-occupiers is behavioural: offset accounts feel more liquid and accessible, which can encourage people to keep more money working against the mortgage rather than holding it in a savings account. For borrowers who are disciplined and would never need to access the money anyway, redraw works just as well — and on loans where redraw is free but offset has a monthly fee, redraw can actually be slightly better.
Which to Choose: Owner-Occupier vs Investor
Owner-occupier: Either works well. Choose offset if you want maximum liquidity (the money feels more accessible even if access is the same in practice) or if you might convert the property to an investment in future — in which case the offset structure will protect deductibility from day one. Choose redraw if your lender charges an offset account fee and you have no plans to rent out the property.
Property investor: Use an offset account, not redraw. The tax risk from redrawing for private purposes is real, can be irreversible without complex loan restructuring, and the cost in lost deductions over time typically far outweighs any fee savings from using redraw. This is a near-universal recommendation from tax accountants and mortgage brokers who work with property investors.
Future property investor (owner-occupier now): If there is any realistic chance your current home could become an investment property in the next 5–10 years (you might buy elsewhere and keep the current property as a rental), set up the offset account from the beginning. If you have been making extra repayments via redraw and later convert the property to an investment, you may find some of your loan proceeds have been "mixed" if you have ever redrawing for private purposes — making the tax calculation unnecessarily complex.
Frequently Asked Questions
- Does an offset account reduce my loan balance?
- No. An offset account does not change your loan balance. It reduces the amount of interest charged each day by offsetting the account balance against the principal for interest calculation purposes only. Your actual loan balance remains the same, and the full principal is still outstanding. The reduction in daily interest means more of each repayment goes toward principal, which speeds up loan repayment over time.
- Is my money safe in an offset account?
- Offset accounts are deposits with Australian authorised deposit-taking institutions (ADIs) and are protected by the Australian government's Financial Claims Scheme (FCS) up to $250,000 per account holder per institution. Your money is as safe as it would be in any other bank account with the same lender.
- Can I have multiple offset accounts?
- Many lenders allow multiple offset accounts linked to a single loan. This can be useful for budgeting — for example, keeping your emergency fund, upcoming tax payment and regular savings in separate offset accounts that all reduce interest on the same mortgage.
- What happens to my redraw balance if I sell the property?
- When you sell, the full outstanding loan balance is paid out from sale proceeds. If you have redraw available, the loan balance at settlement already reflects those extra repayments — there is no separate "redraw account" to deal with. The net effect is the same as if the loan balance had simply been lower.
