Offset vs Redraw: Which is Better for Your Australian Mortgage?

Quick Answer: Which Should You Choose?

Choose Offset If...

• You have an investment property
• You want full flexibility
• You may convert to investment later
• You can maintain a decent balance

Choose Redraw If...

• It's your home (PPOR) only
• You want lowest possible fees
• You prefer "locked away" savings
• You have a small surplus each month

Understanding the Basics

Both offset accounts and redraw facilities help you reduce the interest you pay on your home loan. But they achieve this in fundamentally different ways, with significant implications for flexibility, fees, and tax.

What is an Offset Account?

An offset account is a transaction account linked to your home loan. The balance in your offset is deducted from your loan balance before interest is calculated.

Offset Example

Loan Balance

$500,000

Offset Balance

- $50,000

Interest Charged On

$450,000

At 6.5% interest, this saves $3,250/year in interest!

The key feature: your money stays in a separate account. The loan balance remains unchanged—you've just reduced the interest calculation.

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, those extra funds can be "redrawn" later.

Redraw Example

Original loan: $500,000

Extra repayments made: $50,000 over several years

Current loan balance: $420,000 (including normal principal)

Redraw available: Up to $50,000

You pay interest on the reduced balance ($420,000), but can redraw the $50,000 if needed—though this increases your loan balance again.

The key difference: with redraw, your extra payments reduce your actual loan balance. This has major tax implications for investment properties.

The Critical Tax Difference

Investment Property Warning

Using redraw on an investment property can permanently reduce your tax deductions. This is one of the most common and expensive mistakes Australian property investors make.

Why Redraw Destroys Tax Deductions

For investment properties, you can claim interest as a tax deduction. But the ATO cares about the purpose of the borrowing, not just the loan itself.

Here's the problem with redraw:

You have a $500,000 investment property loan (100% deductible)
You make $100,000 in extra repayments over time
Your loan balance is now $350,000 (with $100,000 redraw available)
You redraw $100,000 to buy a new car
Result: Only $350,000 of your loan remains deductible. The $100,000 you redrawed for personal use is NOT deductible.

At a 37% marginal tax rate, losing $100,000 in deductible debt costs you approximately $2,400/year in lost tax savings (at 6.5% interest).

Why Offset Preserves Tax Deductions

With an offset account on the same investment property:

Your loan remains $500,000 (100% deductible)
You keep $100,000 in offset (reducing interest, but loan balance unchanged)
You withdraw $100,000 from offset for a car
Result: Your full $500,000 loan is still deductible. You just temporarily reduced interest savings while funds were in offset.

Tax Rule of Thumb

Investment property? Almost always use offset, not redraw.
Owner-occupied only? Either option works—choose based on fees and flexibility.

Feature Comparison

Feature	Offset Account	Redraw Facility
Interest savings	Same	Same
Reduces loan balance?	No	Yes
Typical annual fee	$0-395 (package)	Usually free
Access method	Debit card, transfers	Transfer (may take days)
Investment property tax	Preserves deductions	Destroys deductions
Lender restrictions	Rarely any	May have minimums
100% offset available?	Usually yes	N/A
Daily interest calculation	Every dollar counts	Every dollar counts

The Fee Question: Is an Offset Worth It?

Offset accounts often come with a package loan that costs $300-495 per year. Is it worth it? Use our Offset Account Calculator to find out, but here's a quick reference:

Annual Fee	Break-Even @ 6%	Break-Even @ 6.5%	Break-Even @ 7%
$295	$4,917	$4,538	$4,214
$395	$6,583	$6,077	$5,643
$495	$8,250	$7,615	$7,071

Minimum offset balance needed to cover the annual fee

If you consistently keep more than the break-even amount in your offset, you come out ahead. If your balance is usually lower, a basic loan with redraw may be more cost-effective (for owner-occupied properties).

Strategic Uses for Each Option

Best Uses for Offset Accounts

1. Investment property loans: Preserves full tax deductibility
2. Salary parking: Have wages paid into offset, pay bills from there
3. Emergency fund: Keep 3-6 months expenses accessible while reducing interest
4. Saving for next property: Build deposit while minimizing interest
5. Future flexibility: If you might convert PPOR to investment later

Best Uses for Redraw

1. Owner-occupied, never-investment: If you'll never rent it out
2. Psychological "lock-in": Some find it harder to spend from redraw
3. Fee minimization: When offset fees exceed interest savings
4. Renovations fund: Extra payments towards a planned renovation

Real-World Scenarios

Scenario 1: The First Home Buyer

Sarah: $500K loan, plans to live there 10+ years, $5K spare per month after expenses

Best choice: Offset account

With $5K/month flowing through, Sarah will quickly have $50-60K in offset, easily covering any package fee. Plus, if circumstances change and she wants to rent it out later, she hasn't destroyed tax deductibility.

Scenario 2: The Property Investor

Mike: $600K investment property loan, already owns PPOR, wants to claim maximum deductions

Best choice: Offset account (absolutely)

Mike should never make extra repayments or use redraw on his investment loan. An offset account lets him reduce interest without reducing his deductible debt. At 37% marginal rate, preserving deductions saves thousands annually.

Scenario 3: The Fee-Conscious Homeowner

Lisa: $300K loan, lives paycheck to paycheck, never more than $2K spare

Best choice: Basic loan with redraw

With minimal surplus, Lisa can't generate enough interest savings to cover a $395/year package fee. A basic variable loan with free redraw saves her money, and since it's owner-occupied only, the tax implications don't matter.

Common Mistakes to Avoid

Mistakes That Cost Thousands

1. Using redraw on investment properties: Destroys tax deductions permanently
2. Paying for offset you don't use: If balance is too low, the fee costs more than savings
3. Not using 100% offset: Some lenders offer "partial" offset—avoid these
4. Multiple offset accounts: Usually only the primary offset is linked; verify!
5. Confusing the two: Some people think redraw IS an offset—they're very different

Converting Your PPOR to Investment Property

If you've been using redraw on your owner-occupied home and later want to rent it out, you have a problem. The loan structure is now "contaminated"—the extra repayments reduced the deductible portion.

How to Prepare for Future Investment

Use offset from day one: Keep loan balance high, savings in offset
Never make extra repayments: Put any surplus in offset instead
When converting: Withdraw offset savings for your new home deposit
Result: Investment loan remains at original balance = maximum deductions

Making Your Decision

Decision Flowchart

Q1: Is this an investment property or might become one?
→ Yes: Use offset
→ No: Continue...

Q2: Will you have $5,000+ consistently in savings?
→ Yes: Offset probably worth the fee
→ No: Redraw may be more cost-effective

Q3: Do you want easy daily access to funds?
→ Yes: Offset (debit card access)
→ No: Either works

Final Thoughts

For most Australians, especially those with any chance of property investment, an offset account is the safer, more flexible choice. Yes, it may come with a fee, but the tax protection and flexibility are worth it.

Redraw has its place—particularly for owner-occupied homes where every dollar of savings matters and the offset fee exceeds potential savings.

Use our Offset Account Calculator to model your specific situation and see which option saves you more money over the life of your loan.

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