Offset vs Redraw: Mechanics, Tax and Which Suits You
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.
How an offset account works
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](/calculators/offset).
How redraw works
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](/articles/home-loans/fixed-vs-variable) decision.
The tax difference if you ever rent the property out
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](/loans/investment-loans) is even a maybe, it is usually safer to accumulate savings in offset rather than paying the loan down and relying on redraw.
A 15-minute chat is usually enough to map your options — free, no obligation.
Fees and rate differences
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.
Which one suits you
Choose offset if:
- You hold meaningful savings or irregular income and want everyday access to it
- You might convert this home into a rental later and want to protect interest deductibility
- You are disciplined enough not to spend money just because it is accessible
Choose redraw (or a basic loan without offset) if:
- Your loan is a keeper — you are confident the property will never become an investment
- Your savings buffer is small, so an offset package fee would outweigh the benefit
- A little friction on withdrawals actually helps you leave the money alone
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](/loans/refinance) — weigh the switching costs against the benefit first.
Talk it through with a broker
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](/contact) — we will lay out the options in plain English.
Frequently asked questions
Is an offset account better than redraw?
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.
Does money in an offset account reduce my loan balance?
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.
Why does the offset vs redraw choice matter for tax?
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.
Can I have an offset account on a fixed rate loan?
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.
Is it worth paying an annual fee for an offset account?
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.