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Offset vs Redraw Facility: What’s the Difference and Why It Matters
Most borrowers know that offset and redraw facilities help reduce the interest on their home loan. Fewer know how differently they work – and how badly a mix-up can cost you come tax time.
Here’s what you need to know.
What Is an Offset Account?
An offset account is a separate transaction account linked to your home loan. The balance in that account is offset against your loan balance daily, and you only pay interest on the difference.
So if your loan balance is $600,000 and you have $50,000 sitting in your offset account, you’re charged interest on $550,000. The $50,000 stays yours. You can deposit and withdraw freely, just like an everyday bank account. Most lenders offer offset on variable rate loans, and some offer it on fixed rate products too – though often with restrictions or an added fee.
Key point: the money in an offset account never actually touches the loan. It sits beside it.
What Is a Redraw Facility?
A redraw facility lets you access extra repayments you’ve made on top of your minimum. If your required monthly repayment is $3,000 and you’ve been paying $3,500 each month, that extra $500 per month builds up as a redraw balance you can draw back out when needed.
Unlike an offset, the extra money has actually gone into the loan. Redraw just gives you a mechanism to pull it back out.
Key point: the money in a redraw facility has been applied to the loan principal. Getting it back out is a withdrawal from the loan – not a transfer from your own account.
The Practical Differences
Offset accounts typically come with a debit card and BSB/account number. They function like a normal bank account. You can set up your salary to be paid directly into offset, which keeps the balance high and your interest low throughout the month.
Redraw is usually accessed online or via branch request. Some lenders impose minimum redraw amounts, charge a fee for each redraw, or reserve the right to restrict access – particularly on fixed rate loans or during periods of financial stress.
Accessibility matters. If you need to get to your money quickly, offset is generally more reliable. Redraw is subject to lender policy, which can change.
The Tax Difference – and Why It’s Critical
This is where things get serious. For owner-occupiers who plan to stay in their home forever and never use the property for investment purposes, the distinction may not matter much practically. But if there’s any chance you will:
- convert your home into an investment property in the future
- use your equity to fund an investment purchase
- rent out part of your home
…then understanding the tax treatment of offset versus redraw is essential.
How the ATO Determines Interest Deductibility
Interest deductibility on investment loans is determined by the purpose of the funds borrowed. This is known as the “use” test under Australian tax law.
Why Offset Keeps Things Clean
With an offset account, the loan balance and its purpose remain unchanged. If your loan was originally used to purchase your home, the interest on that loan balance is not deductible – but importantly, the offset money hasn’t mixed with the loan. If you later move out and rent the property, the loan purpose was to buy the home, so interest may become deductible based on current use.
Why Redraw Gets Complicated
With a redraw, the situation is more complex. When you redraw funds from a loan, you’re effectively re-borrowing money. The question the ATO asks is: what is that re-borrowed money being used for? If you redraw $40,000 and use it for a holiday, a renovation on your home, or personal expenses, that portion of the loan is now mixed – part investment, part private. This can make it very difficult to claim the full interest as a deduction, even if the property later becomes an investment.
What Is Loan Contamination?
This is called loan contamination, and it’s a genuine problem for people who redraw for personal purposes and later rent out the property.
The ATO has also indicated in various rulings that redrawing from a previously investment-purpose loan for private use reduces the deductible portion of the interest. Once a loan is mixed, untangling it is complex and sometimes impossible without refinancing.
A Real-World Example
Take a borrower who has a $500,000 investment loan, makes extra repayments to bring the balance down to $430,000, then redraws $40,000 to pay for a holiday. Their loan is now back at $470,000, but only $430,000 was used for investment purposes. The interest on the extra $40,000 is not deductible. If they later try to claim interest on the full $470,000, that’s a problem with the ATO.
Now imagine the same scenario with an offset account. The borrower parks $70,000 in offset, keeping the loan at $500,000. They later spend $40,000 of that offset money on the holiday. The loan balance is still $500,000. Its purpose hasn’t changed. There’s no contamination.
Which One Should You Use?
For owner-occupiers with no investment plans and no need for tax deductibility: either product can work well. Redraw can be a simple, cost-effective option since some lenders charge a monthly fee for an offset account.
For investors, or for anyone who might one day turn their home into an investment property: an offset account is almost always the better tool. It keeps your loan purpose clean, preserves future deductibility, and gives you flexibility without the tax risk.
If you currently have a redraw facility and you’ve been using it for personal spending, it’s worth speaking to your accountant about your current position before the situation becomes more complicated.
The Bottom Line
Both offset and redraw reduce your interest. But they work very differently, and the tax implications – particularly for investors or future investors – can be significant.
The decision about which structure suits your situation involves your loan type, your lender’s product range, your goals, and your tax position. That’s exactly the kind of thing a good mortgage broker can help you think through.
If you want to talk through your home loan structure, get in touch with the team at Ingram Financial. We work with dozens of lenders and can help you find a setup that works for where you are now and where you’re heading.
Disclaimer: This article is general information only and does not constitute tax advice. Tax laws and their application can be complex and vary depending on your individual circumstances. You should always speak with a qualified tax adviser or accountant before making decisions based on the tax treatment of your loan structure. Nothing in this article should be relied upon as a substitute for professional tax advice.
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