Offset Account vs Redraw: What's the Difference?
Offset accounts and redraw facilities both cut loan interest — but if your home ever becomes a rental, the tax difference can cost you thousands, permanently.
An offset account and a redraw facility both park spare cash against your home loan and shrink your interest bill by the same amount. Day to day, you can't tell them apart.
But if there's any chance your home becomes a rental one day, using the wrong one can cost you thousands in lost tax deductions — costs you'd otherwise subtract from your income at tax time. Permanently. Here's how each works, and why the tax office treats these near-identical twins like total strangers.
Offset: your money, parked next door
An offset account is a regular bank account linked to your home loan. Your loan balance stays exactly what it is — the bank just charges interest on the loan minus whatever sits in the offset.
Owe $500,000 with $50,000 in offset? You pay interest on $450,000. Your salary lands there, you spend from it like any account, and every dollar sitting in it saves you interest.
The key detail: it's your money, in your account. You never paid down the loan — you just parked cash beside it.
Redraw: paying the loan, then borrowing it back
Redraw works in reverse. You make extra repayments directly into the loan, genuinely shrinking what you owe, and the bank lets you 'redraw' those extras if you need the cash back.
On interest, the maths matches — pay $50,000 extra into a $500,000 loan and you're charged interest on $450,000, same as the offset.
But legally, you repaid part of the loan, and every redraw is new borrowing from the bank — not withdrawing savings. That one distinction is where the trap lives.
The purpose test: the ATO follows the money
The ATO decides whether loan interest is deductible based on what the borrowed money was used for — not which house the loan is attached to. Purpose, not postcode.
Say you buy a home, pay $100,000 extra into the loan over the years, then redraw that $100,000 for a car, a holiday and some renovations. Later, you move out and rent the place to tenants.
That redraw was new borrowing for personal spending, so a slice of your loan is now 'private' forever, and the interest on it can never be claimed — even with tenants paying rent. That's loan-purpose contamination: the ATO cares what borrowed money was for, not which account it sits in. Like mixing paint — once the private colour goes in, no amount of stirring gets it out. Worse, every repayment is split across both parts in proportion, so you can't aim repayments at the private slice to flush it away.
🎨The trap
Redrawing for personal spending taints the loan's purpose permanently. There's no undo, no fix-it-later — the private slice stays non-claimable for the life of the loan.
Why offset keeps every door open
Now rerun the same life with an offset: the spare $100,000 sat in the offset account instead. Buying the car and taking the holiday spends your own savings — the loan was never repaid, never re-borrowed.
Move out and rent the property, and the full original loan is still 100% 'for buying that property'. All the interest becomes claimable. And since your offset cash left the account, the interest bill grows — which is now a bigger deduction against your rent.
Same dollars, same house, wildly different tax outcome. If you might ever upgrade homes and keep the old one as a rental, the offset setup deserves serious thought.
So which button do you press?
If your home will always be your home, it barely matters. Pick whichever is cheaper — offsets sometimes carry package fees or slightly higher rates, while redraw is often free.
If there's even a chance the property becomes a rental later, offset keeps the whole loan claimable. Heavy redraw use can permanently shrink what you're allowed to claim.
Before any big move — especially turning your home into a rental — a session with a tax professional or mortgage broker is cheap insurance.
💡Quick win
Not sure if you'll ever rent the place out? Default to the offset. It costs little extra and keeps the full deduction alive — you can't say that about redraw after the fact.
FAQ
Do offset and redraw save the same amount of interest?
Essentially yes — both cut the balance your interest is worked out on, dollar for dollar. The real differences are flexibility, fees, and what happens to your tax deductions if the property ever earns income.
I've already used redraw on my future rental — is it ruined?
Not ruined, but the redrawn money spent on personal things generally stays non-claimable, and repayments keep splitting across both parts of the loan. A tax professional can work out your claimable share and whether reshuffling the loans helps.
Does money in an offset account earn taxable interest?
No — and that's one of its best features. An offset doesn't pay you interest; it reduces the interest you're charged. No interest income, nothing to declare, so the benefit is effectively tax-free.
Run your own numbers
Sources: figures checked against ATO published rates and thresholds for FY2025-26 at the review date. See how we check our numbers.
⚠️ General information only — not tax or financial advice. Figures relate to FY2025-26 unless stated otherwise.