Offset Account vs Redraw: What’s the Difference?
Both features can save you interest, but they work differently when it comes to accessing your money and tax implications.
An offset account is a separate transaction account linked to your loan, while a redraw facility allows you to access extra repayments you have already made directly into the loan account. Both reduce the balance on which your interest is calculated.
How they work
Offset account: This is a standard bank account where your salary can be deposited and from which you can pay bills. The balance is offset against your loan daily. The money remains yours and is separate from the loan.
Redraw facility: When you pay more than your minimum required repayment, the extra funds sit in your loan account, reducing your balance and your interest. A redraw facility allows you to withdraw those extra funds if you need them.
Illustrative example
Illustrative example: You have a $400,000 loan. If you put $20,000 into an offset account, you are charged interest on $380,000. If you instead make a $20,000 extra repayment into the loan, your loan balance becomes $380,000, and you are charged interest on that amount. You can later use redraw to pull that $20,000 back out.
What may change the outcome
Lender policies on redraw vary. Some lenders charge a fee for every redraw, require a minimum redraw amount, or restrict how quickly you can access the funds. Offset accounts generally offer immediate access via debit cards, but often come with an annual package fee.
Common misunderstandings
A major misunderstanding relates to tax on investment properties. If you redraw money from an investment loan for personal use (like buying a car), the interest on that redrawn portion is generally no longer tax-deductible. Using money from an offset account does not affect the tax deductibility of the original loan.
When a personal review may help
If you plan to turn your current home into an investment property in the future, the choice between offset and redraw can have significant tax consequences. A broker can help structure your loan to protect your future options.
Next step
Read our Property Investors guide to learn more about structuring loans for future investment.
This article provides general information only and does not take into account your objectives, financial situation or needs. It does not constitute personal credit, financial, tax or legal advice. Lending outcomes depend on individual circumstances, lender policy and assessment.
Have questions about your situation?
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