Offset account vs redraw facility on an Australian home loan
How each feature works
Australian home loans often come with one or both of two interest-reduction features:
Offset account: a separate transaction account linked to your loan. The balance in this account is offset against your outstanding loan balance daily before interest is calculated. If your loan balance is $500,000 and your offset account holds $40,000, interest is charged only on $460,000. The money in the offset account remains fully accessible — it behaves like a normal bank account.
Redraw facility: allows you to make extra repayments into the loan itself, then withdraw those extra funds if needed. Like an offset account, extra repayments reduce the loan balance on which interest is charged. However, accessing the funds requires submitting a redraw request, and lenders may impose minimum redraw amounts, processing times, or fees.
The interest saving is the same — the difference is access
Mathematically, $40,000 in an offset account produces the same interest saving as $40,000 in extra repayments on a redraw facility — both reduce the daily balance on which interest accrues. The practical difference lies in:
- Access speed: offset funds are instantly accessible by card or transfer; redraw funds may take a business day and require a formal request
- Lender discretion: some loan contracts allow lenders to restrict redraw during hardship periods or if the loan falls behind — funds you have redrawn cannot be guaranteed available; offset balances are always accessible as a deposit account
- Fees: some lenders charge a monthly fee for an offset account but offer redraw at no cost
Tax treatment for property investors
This is where the difference becomes significant. If you later convert your home to a rental property (or take out a new investment loan), the ATO’s rules on mixed-purpose borrowing apply:
- Offset account: the funds in the offset account are your money — they are never part of the loan. If you withdraw offset funds to buy a car or holiday and then rent out the property, the full outstanding loan balance is treated as investment borrowing and remains deductible.
- Redraw facility: extra repayments you have made reduce the original loan balance. If you redraw those funds for private purposes (a car, holiday, or other non-investment use), the redrawn portion is classified by the ATO as a new private loan. Interest on that redrawn portion is not deductible — even though it sits within the same loan account.
For owner-occupiers who have no plans to ever rent out the property, this distinction rarely matters. For anyone who might one day turn their home into an investment property, maintaining savings in an offset account rather than making extra repayments into redraw is generally the more flexible approach.
Choosing between them
| Feature | Offset account | Redraw facility |
|---|---|---|
| Interest saving | Same as redraw | Same as offset |
| Access | Instant (transaction account) | Usually 1 business day, may have minimum |
| Tax flexibility (investors) | Better — funds stay separate | Risk of mixed-purpose borrowing |
| Monthly fees | Sometimes | Usually free |
| Suitable for | Owner-occupiers and investors | Owner-occupiers prioritising simplicity |
Many variable-rate home loans include both features. If yours does, consider using the offset account as your primary savings vehicle and making minimum extra repayments through redraw.
Things to check with your lender
- Does your loan offer a 100% offset account, or only a partial offset?
- Is the offset account available on fixed-rate portions of split loans? (Many lenders do not permit offset on fixed-rate tranches.)
- Are there monthly fees for maintaining the offset account?
- What are the minimum redraw amounts and any associated fees?
A mortgage broker or your existing lender can clarify these details for your specific loan product.