Offset Account vs. Redraw: What’s Better for Investors?

When you apply for a home loan, the banker or broker will inevitably ask: "Do you want a basic loan with redraw, or a package with an offset account?"

On the surface, they seem to do the exact same thing. Both features allow you to use your spare cash to lower the interest charged on your mortgage. Both can help you pay off your loan faster.

However, for property investors, the difference between these two features is massive. Choosing the wrong one could create a tax nightmare that costs you thousands in lost deductions.

Here is the breakdown of how they work, and why the "smarter" choice isn't always the cheapest one.

How They Reduce Your Interest

First, let’s look at the similarities.

If you have a $500,000 mortgage and you have $50,000 in cash, both an offset account and a redraw facility allow you to pay interest on only $450,000.

In both scenarios, the bank calculates your daily interest on the net balance. This saves you money and accelerates the reduction of your principal (if you are paying principal and interest).

But the mechanism, and the legal definition of where that money sits, is where the paths diverge.

The Redraw Facility: Paying It Off

A redraw facility isn't a separate bank account; it is a feature of the loan itself. When you put money into your loan (above your minimum repayment), you are technically paying down the debt.

The bank then gives you the option to "redraw" or borrow that extra money back if you need it later.

For a standard homeowner paying off their own roof, this is fine. But for an investor, this can be risky. If you pay down the loan and then redraw that money later for a personal purchase (like a car or a holiday), the purpose of that portion of the loan changes.

In the eyes of the ATO, the interest on the portion you redrew for personal use may no longer be tax-deductible.

You have effectively "contaminated" the loan, mixing investment debt with personal debt, which creates a headache for your accountant.

The Offset Account: Parking Your Cash

An offset account is a separate transaction account linked to your mortgage. The money you put here does not technically pay off the loan; it just sits alongside it.

Because you haven't paid down the debt, the original loan balance remains intact. The bank simply subtracts the balance of your offset account from your loan balance before calculating interest.

This distinction is crucial for flexibility. If you decide to take $50,000 out of your offset account to go on a holiday, you aren't "re-borrowing" money. You are simply withdrawing your own savings.

Because the loan itself was never paid down, the interest on the full loan balance generally remains tax-deductible (assuming the loan was used entirely to buy the investment property).

Cost vs. Flexibility

So, why doesn't everyone just use an offset account? The answer is usually cost.

Loans with full 100% offset accounts are often "Package" loans. These typically come with an annual fee (often around $395) or a slightly higher interest rate compared to a "Basic" loan.

A Basic loan with a redraw facility often has zero ongoing fees and a razor-sharp interest rate.

Which One Is Right for You?

The decision usually comes down to your future plans.

Consider a Redraw Facility if:

• You are extremely disciplined and unlikely to touch the savings.

• You want the absolute lowest interest rate and zero fees.

• This is your "forever" debt that you just want to eliminate as fast as possible.

Consider an Offset Account if:

• You are an investor who wants to preserve tax deductibility.

• You want to turn your current home into an investment property in the future.

• You need easy, instant access to your cash via an ATM card or app.

• You are saving a deposit for your next property purchase.

The Investor’s Verdict

For most property investors, the flexibility of an offset account is worth the annual fee. It acts as a tax-efficient holding tank for your cash. It allows you to save interest today while keeping your powder dry for future deposits or personal expenses, without messing up the tax structure of your investment loan.

It is about keeping your options open. In the game of property investment, flexibility is often just as valuable as the interest rate.

Keen to understand how this applies to your situation? We’ll help you break it down and plan the next step.

Disclaimer:

The information in this article is general in nature and does not take into account your personal financial, legal, or tax circumstances. Property structures, tax regulations, and superannuation rules may change over time. You should seek advice from a qualified professional and refer to the latest ATO and government guidelines before making any investment or structuring decisions.