Offset account vs redraw: why the difference matters at tax time
They save the same interest. They are not the same thing — and the difference shows up when your home becomes an investment.
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On a bank comparison site, an offset account and a redraw facility look interchangeable. For an owner-occupier who will never move out, they nearly are. For anyone who might turn their home into an investment, or who already holds investment debt, choosing the wrong one can cost real money.
How each works
An offset account is a transaction or savings account linked to your loan. Interest is calculated on the loan balance minus the offset balance, but the loan balance itself doesn’t change. A redraw facility lets you take back extra repayments you have already made — the loan balance does fall, and redrawing increases it again.
Why tax treats them differently
Interest on a loan is deductible based on what the borrowed money is used for. When you redraw, you are drawing new borrowed money; if you use it for a holiday or a car, that portion of the loan is no longer for an income-producing purpose. On an investment loan, that reduces the interest you can claim and complicates every tax return after it.
Offset funds are your own savings. Moving them in and out does not change the purpose of the loan.
The scenario that catches people out
You buy a home and pay $150,000 extra off the loan. Five years later you move out, rent it and buy a new home. If the $150,000 is in redraw, the deductible loan is now $150,000 smaller — drawing it back out to fund your new home doesn’t restore the deduction. Had it been in an offset account, you could move the savings to your new home deposit and the full original loan would remain against the rental.
| Offset account | Redraw | |
|---|---|---|
| Interest saved | Same | Same |
| Loan balance | Unchanged | Reduced |
| Tax flexibility later | High | Low |
| Cost | Often a package fee | Usually free |
Which to choose
If there is any chance the property becomes an investment, or you hold investment debt, an offset account is usually worth any package fee. If you will live in the home forever and want simplicity, redraw is fine.
Common questions
No. Dollar for dollar, both save the same interest while the funds sit there.
Some lenders offer partial or full offset on fixed loans, but many limit it. A split loan is a common workaround.
It is available to you, but legally it is an extra repayment. Some lenders can restrict redraw.
Sources
- Australian Taxation Office — interest deductions and the purpose of borrowed funds
- Moneysmart (ASIC) — offset accounts and redraw facilities
General information
This article is general information only. It is not credit assistance, a credit product recommendation or an offer of finance, and it does not take into account your objectives, financial situation or needs. Any application is subject to the lender’s assessment and criteria.
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