Offset Account vs Redraw: The Real Difference

Key takeaways

• Both reduce the balance interest is charged on, so the headline saving is much the same.
• Offset funds remain your savings; redrawn funds are new borrowing, and their deductibility depends on what you spend them on.
• Redraw is often free, while offset usually sits inside a package with an annual fee of around $395.
• Lenders can reduce or freeze redraw availability; an offset balance is not subject to that.

How are they the same?

Take a $600,000 loan at 6.5% with $40,000 available. Whether that $40,000 sits in an offset account or has been paid into the loan and is available for redraw, the lender charges interest on $560,000. One month of interest is $560,000 × 0.065 ÷ 12 = $3,033, versus $3,250 on the full balance — a saving of $217 a month either way.

Where the difference becomes expensive

The Australian Taxation Office looks at the purpose of borrowed funds to decide whether interest is deductible.

Consider a homeowner with $100,000 of spare cash who later converts the home into a rental:

• Held in offset: withdraw the $100,000 for a new home. The investment loan balance returns to its full amount, and interest on the whole balance relates to the rental property. Deductibility is preserved.
• Paid into the loan, then redrawn: the redraw is a new borrowing of $100,000 used to buy a private residence. Interest on that portion is generally not deductible, even though the loan is secured against the rental.

Same cash, same interest saved along the way, materially different tax outcome. This is one of the most common and costly errors made by accidental landlords.

Which should you choose?

The package fee only pays for itself above a certain balance: at 6.5%, a $395 fee is covered by roughly $6,100 sitting in offset.

Frequently asked questions

Can my lender take away my redraw?

Lenders can reduce or suspend redraw availability, and several did so during periods of stress. Loan contracts commonly permit it. An offset balance sits in your own account and is not subject to the same discretion.

Is offset interest taxable?

No. You are not earning interest, you are avoiding it, so there is no income to declare. That is what makes an offset equivalent to a savings account paying substantially more before tax.

Should I get advice before redrawing on an investment property?

Yes. The deductibility consequences depend on the purpose of the redrawn funds and are difficult to unwind afterwards. Speak to a registered tax agent before moving money.

Related reading

• Offset Account Maths: Dollar-for-Dollar Savings Modelled
• Fixed vs Variable in a Hiking Cycle: The 2026 Decision Framework
• Stress-Testing Your Own Budget at +3%

Sources

• Rental properties - interest expenses and deductibility — Australian Taxation Office
• Offset accounts and redraw facilities — ASIC Moneysmart