Offset vs Redraw: Mechanics, Tax and Which Suits You
MakeMyLoan Editorial8 May 20265 min read
Reviewed by Pratik Chauhan — Finance & Mortgage BrokerUpdated 14 July 2026
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Offset accounts and redraw facilities do the same headline job — they use your spare cash to reduce the interest on your home loan. But they work through different mechanics, they are treated very differently by the tax office if you ever turn your home into an investment property, and they suit different kinds of borrowers. Understanding the difference before you choose can save you from an expensive restructure later.
An offset account is a separate transaction account linked to your home loan. When the lender calculates your daily interest, it charges interest on the loan balance minus the offset balance. Money in offset is still your money in an everyday account: you can have your salary paid into it, spend from it with a card, and move it whenever you like. Nothing you deposit reduces the loan balance itself — it just reduces the interest calculated on it.
Because loan interest usually costs more than a savings account earns — and offset benefits are not taxed as income, while savings interest is — offsetting spare cash is generally more effective than parking the same money in a savings account. You can see how an offset balance changes your interest and loan term with our offset calculator.
Redraw is not a separate account. When you make extra repayments directly onto your loan, the loan balance drops and you pay interest on the smaller balance. The redraw facility simply lets you take those extra repayments back out later if you need them.
The interest saving is identical in principle to offset — a dollar in either place reduces your interest-bearing balance by a dollar. The differences are about access and ownership. Redraw can come with minimum withdrawal amounts, processing delays or fees at some lenders, and — importantly — the money legally sits in the loan, not in an account you control. Lenders have, in stressed conditions, reduced or frozen redraw availability, which is rare but worth knowing. Redraw is also usually restricted or unavailable during fixed terms, which ties into the fixed vs variable decision.
This is the difference that catches the most people, and it matters even if an investment property feels like a distant idea. The tax treatment of loan interest depends on what the borrowed money was used for, not on what property secures the loan.
Say you buy a home, and over the years you park spare cash against the loan. Later you upgrade to a new home and keep the old one as a rental. If that spare cash sat in an offset account, you simply move it to your new home's loan — the old loan balance was never reduced, so the interest on it generally remains deductible against the rent. If instead you paid the cash into the loan and redraw it to help buy your new home, the redraw is treated as new borrowing for a private purpose — so that portion of the loan's interest is generally not deductible, even though the property is now earning rent.
In short: offset preserves your future deductibility; paying down and redrawing can permanently shrink it. This is general information, not tax advice — the rules turn on your specific facts, so speak to a registered tax agent before restructuring. If a future investment property is even a maybe, it is usually safer to accumulate savings in offset rather than paying the loan down and relying on redraw.
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Offset accounts are commonly attached to package loans that carry an annual fee, or to products with a slightly higher rate than a no-frills loan. That cost only earns its keep if your offset balance is large enough — a small, static balance may save less interest than the package fee costs. Redraw, by contrast, is often free on basic variable loans, though some lenders charge per redraw or set minimum amounts. When comparing products, price the whole structure: rate, annual fee and how you will actually use the account — not just the headline rate. Also check the fine print on the offset itself: a full offset counts every dollar against your loan daily, while a partial offset only counts a percentage — and multiple offset accounts, handy for bucketing savings, are offered by some lenders and not others.
Choose offset if:
Choose redraw (or a basic loan without offset) if:
Many borrowers use both: salary and savings in offset for flexibility, plus deliberate extra repayments for money they never intend to touch. And if your current loan has neither feature and you want them, that can be a reason to refinance — weigh the switching costs against the benefit first.
The offset-versus-redraw choice looks small but shapes your fees, flexibility and future tax position. If you want help structuring a loan around how you actually save and where you are heading, get in touch — we will lay out the options in plain English.
Dollar for dollar, both reduce your interest identically. Offset gives you everyday access to the money and protects future tax deductibility if the property later becomes a rental, but often comes with a package fee or slightly higher rate. Redraw is usually cheaper but less accessible, and redrawing for private purposes can permanently reduce interest deductibility on a future investment property.
No. Offset money stays in a separate transaction account you control — it never touches the loan balance. The lender just calculates daily interest on the loan balance minus the offset balance. Extra repayments, by contrast, actually reduce the loan balance, and redraw lets you take them back out later.
Interest deductibility follows the purpose of the borrowing. If you redraw money you had paid onto the loan and spend it privately, that portion of the loan generally stops being deductible if the property later earns rent. Moving money out of an offset account does not change the loan at all, so deductibility is preserved. Confirm your situation with a registered tax agent.
Usually not a full one. Most lenders offer no offset or only partial offset during fixed terms, and redraw is typically restricted too. If offsetting savings is central to your plan, keep part of your loan variable through a split, or look at the small number of lenders offering full offset on fixed rates.
Only if your average offset balance saves you more interest than the fee costs. Borrowers with healthy savings or salary sitting in offset all month usually come out ahead; borrowers with a small, static balance often do better on a cheaper basic loan with free redraw. Run your own numbers before paying for features you will not use.
This article is general information only and doesn't consider your personal objectives, financial situation or needs — it isn't personal credit advice, and lending criteria, rates, fees and government schemes change. Before acting, speak with a licensed MakeMyLoan broker or credit representative who will assess your circumstances and provide a credit guide before any credit assistance is given.