Two features that can save you thousands, if you use them right
Both an offset account and a redraw facility help you pay less interest on your home loan. But they work differently, have different tax implications (especially for investors), and suit different types of borrowers. Understanding the distinction is one of the most financially impactful lessons for any property owner.
What is an offset account?
An offset account is a savings or transaction account linked to your home loan. The balance in the offset account is subtracted from your loan balance when calculating interest.
How offset accounts work: an example
You have a $550,000 home loan at 6% p.a. You keep $50,000 in your offset account.
Interest is calculated on $550,000 − $50,000 = $500,000
Annual interest saving: $50,000 × 6% = $3,000/year
Over 10 years (compound): approximately $35,000+ saved
Your money sits in a standard bank account, accessible by debit card at any time. You can deposit and withdraw freely. It functions exactly like a regular transaction account. except every dollar offsets your loan balance.
What is a redraw facility?
A redraw facility allows you to access extra repayments you've made on your loan. When you pay more than the minimum required repayment, the surplus sits in your loan account and reduces your balance. and therefore your interest. If you need that money back, you can "redraw" it.
How redraw works: an example
Your minimum monthly repayment is $3,200. You pay $4,000/month for 2 years. You've paid $19,200 extra. Your loan balance is $19,200 lower than it otherwise would be, reducing your interest accordingly. You can redraw up to $19,200 if you need it.
Offset vs Redraw: key differences
| Feature | Offset Account | Redraw Facility | |---------|---------------|-----------------| | Where money sits | Separate bank account | Inside the loan account | | Access speed | Instant (debit card) | Usually 1–5 days (some instant) | | Interest impact | Same. reduces interest | Same. reduces interest | | Tax treatment | Better for investors | Can cause issues for investors | | Availability | Usually on variable loans | Available on fixed and variable | | Account features | Full banking (BSB/account number) | Limited banking function |
The critical tax distinction for investors
This is where the difference becomes financially significant, and where many property investors make an expensive mistake.
The contamination problem with redraw
If you own an investment property and have made extra repayments into the loan, then redraw that money for personal use (buying a car, holiday, etc.), you've "contaminated" the loan. The ATO may view that portion of the loan as private. meaning the interest on it is no longer tax-deductible.
This is a serious tax risk that accountants frequently flag.
Why offset avoids this problem
With an offset account, your money sits in a separate account. You never mix personal funds with the loan account itself. If you withdraw from your offset for personal use, the loan balance remains unchanged. there's no contamination issue.
For investment properties: always use an offset account, never rely on redraw.
Owner-occupiers: is the tax issue relevant?
For your primary residence (non-investment), interest is not tax-deductible anyway, so the contamination issue doesn't apply. You can freely use redraw for personal expenses without tax consequences.
However, if you ever plan to convert your owner-occupied home into an investment property in the future (a common strategy), having an offset from day one protects your deductibility.
Which should you choose?
Choose an offset account if:
- You're buying an investment property
- You plan to convert your home to an investment in future
- You want instant access to your savings
- You want full banking functionality (pay bills, receive salary)
- You want maximum flexibility
Choose redraw if:
- You're an owner-occupier with no investment plans
- You want to be disciplined about not touching your savings (redraw is slightly less frictionless)
- You're on a fixed rate loan (offsets often unavailable on fixed loans)
- Your lender doesn't offer offset on your chosen product
Use both (split loan):
On a split loan (part fixed, part variable), you often get:
- Offset on the variable portion
- Redraw on the fixed portion
Do offset accounts cost extra?
Usually yes. either as a slightly higher interest rate (0.05–0.20% above the equivalent no-offset rate) or as a monthly account fee ($5–$15/month). You need to calculate whether the interest saving from your offset balance exceeds the additional cost.
As a rough rule of thumb: if you consistently keep $30,000+ in your offset, the savings will far exceed any additional cost. If your balance is typically $5,000 or less, a cheaper loan without an offset might be better.
We model this exact calculation for every client.
Offset accounts and emergency funds
A home loan offset account is an excellent place to park your emergency fund. Your 3–6 months of expenses sitting in the offset is:
- Instantly accessible if needed
- Actively working to reduce your mortgage interest every day
- Not sitting idle in a savings account earning less than your mortgage rate
The bottom line
For most borrowers with savings. especially investors. an offset account is the superior tool. The tax protection alone makes it essential for investment loans.
For owner-occupiers who don't intend to ever rent their home and want the simplest possible loan structure, a loan with redraw (and a lower rate) can work well.
This decision is one we make together with every client based on their specific situation, goals, and whether they have or plan to have investment properties. It's a 5-minute conversation that can save thousands.
Book a free call to discuss which structure is right for you.