Offset Account or Redraw Facility: How They Work and How They Differ

The Basics: What They Are and How They Differ

Most home loans in Australia include at least one of two features designed to reduce the interest a borrower pays: an offset account or a redraw facility.

An offset account is a regular bank account — with a debit card and instant access — that sits alongside the home loan. Whatever balance is held in that account is subtracted from the loan balance before the lender calculates interest each day. On a $700,000 loan with $50,000 in the offset account, interest is calculated on $650,000, not $700,000. At a rate of 6.5 per cent, that difference saves roughly $3,250 a year. The loan balance itself does not change — only the interest calculation does.

A redraw facility works differently. The borrower makes extra repayments on top of the minimum required, which reduces the actual loan balance. Those extra repayments can later be withdrawn — or "redrawn" — when needed.

For the same amount of money, both features produce the same interest saving. The differences lie in how each is treated for tax purposes, how quickly funds can be accessed, and what happens to the loan if the property is ever rented out.

How Tax Treatment Differs

For property investors, this is the most significant practical difference between the two.

The Australian Taxation Office has a specific rule about redraw facilities, set out in Tax Ruling TR 2000/2. Under that ruling, money withdrawn via redraw is treated as a new borrowing. Whether the interest on that amount is tax-deductible depends on what the money is used for — not on the purpose of the original loan.

Take an investor with a $700,000 loan on a rental property who has made $40,000 in extra repayments and later redraws that amount for a home renovation. Under TR 2000/2, those funds were borrowed for a private purpose. Interest on that portion of the loan is no longer deductible. The loan becomes mixed-purpose — part investment, part personal — and all future interest must be apportioned accordingly. That apportionment runs for the remaining life of the loan and cannot be undone by repaying the personal portion.

The ATO is currently data-matching residential property loan redraws against tax returns for the 2021-22 to 2025-26 income years. Investors with mixed-purpose loans identified through this program are being contacted for review.

Access and Fees

Offset accounts work like a standard transaction account — funds move instantly via internet banking or debit card, with no minimum amount and no processing delay. Redraw access varies by lender: some allow same-day withdrawals, others take two to five business days. Many lenders impose a minimum redraw amount, and some charge a per-withdrawal fee, though this is less common on variable rate products.

On fees, redraw is generally included at no additional cost on variable rate home loans. Offset accounts typically come as part of a packaged loan with a monthly fee of $10 to $20 — around $120 to $240 per year — though some lenders include it at no extra cost.

Fixed rate loans generally do not support either in full. Most lenders restrict redraw access or limit offset functionality during the fixed term. Borrowers splitting between fixed and variable should confirm which applies to each component before committing.

What Happens When a Home Becomes a Rental Property

One of the most consequential differences between the two plays out when an owner-occupier converts their home into a rental property — a move that triggers investment loan rules and makes the starting loan balance matter significantly.

Where savings were held in an offset account, the loan balance remains at its original level. The full amount becomes the basis for interest deductions from day one of the property being rented — and stays that way for the life of the investment.

Where extra repayments were made via redraw, the loan balance at conversion is the reduced figure. That lower balance is what the investor can claim interest deductions on. It cannot be restored.

Over a typical holding period of seven to ten years, the gap in deductible interest between these two positions is material.

How Borrowers Typically Use Each Option

Redraw facilities are commonly used by owner-occupiers who want to get ahead on their mortgage and retain the option to access those extra repayments without maintaining a separate account. The absence of a monthly fee makes it a lower-cost option for straightforward owner-occupied lending.

Offset accounts are commonly used by borrowers who hold or plan to hold investment properties, given the tax treatment described above. They are also used by owner-occupiers who want immediate access to their savings or who anticipate the possibility of converting the property to a rental at a future point.

Both are standard offerings across major and non-major lenders in Australia, and the availability, fee structure, and access terms vary by lender and loan product.

Key Takeaways

• An offset account is a separate bank account linked to a loan. Its balance reduces the amount on which interest is calculated without changing the loan balance itself.
• A redraw facility allows borrowers to withdraw extra repayments they have made into the loan. Those extra repayments reduce the actual loan balance.
• Both produce the same interest saving for the same amount of money. The difference is in tax treatment, access speed, and fees.
• Under ATO Tax Ruling TR 2000/2, redrawn funds are treated as a new borrowing. If those funds are used for personal purposes on an investment loan, the interest on that portion loses its tax deductibility permanently.
• Withdrawing from an offset account does not constitute a new borrowing and does not affect the loan's tax deductibility.
• The ATO is currently data-matching investment property loan redraws against tax returns through the 2025-26 income year.
• When a home with extra repayments made via redraw is converted to a rental, the deductible loan balance is the reduced figure — not the original loan amount.
• Offset accounts carry a monthly fee on most loan products; redraw facilities are typically included at no additional cost.