Both features reduce the interest on your home loan, but the way they work, and what happens when you need the money back, is quite different.
Around 40% of Australian home loans include an offset account, and about 70% have a redraw facility, according to RBA research. Both features let you park savings next to your mortgage to reduce interest, but they do it differently, and for investors especially, choosing the wrong one can create a tax problem.
An offset account is a separate deposit account linked to your mortgage. Every dollar in it reduces the loan balance on which interest is calculated, if you owe $500,000 and hold $50,000 in your offset, you pay interest on $450,000. The $50,000 stays in its own account, available immediately like any transaction account. A withdrawal doesn't touch the actual loan balance at all.
A redraw facility works the other way. Extra repayments go directly onto the loan, reducing your actual balance, and your equity rises. You can retrieve those extra payments later, but not on the same terms as a deposit account. Most lenders require you to transfer funds before spending them, and some charge a fee per redraw or cap how often you can access it.
This surprises many borrowers: parking $20,000 in an offset produces exactly the same interest reduction as making a $20,000 extra repayment into a redraw. Both reduce the effective balance by the same amount. Neither generates interest income, so there is no tax to pay on the saving, the benefit is simply lower interest charged, at the rate of your mortgage.
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| Interest saving | Same dollar for dollar | Same dollar for dollar |
| Access to funds | At-call, like a transaction account | Transfer required; may have fees or limits |
| Effect on loan principal | None, principal stays the same | Withdrawal increases the principal |
| Tax risk on investment loans | Low, funds stay separate from the loan | Higher, redrawn private funds may lose deductibility |
| Typical cost | Package loans, higher fees or rate | Often on basic variable loans, lower cost |
For an investment property, the interest you pay on the loan is generally tax-deductible because it's financing an income-producing asset. The problem with redraw is that if you withdraw funds for a private purpose, a car, a holiday, your own home's renovation, the ATO may treat that redrawn amount as a new private loan. The interest on that portion is no longer deductible, and the more you redraw over time, the messier the apportionment becomes.
An offset account sidesteps this entirely. Because the offset is a separate account, any withdrawal simply comes from your deposit, it has no effect on the loan's balance or its purpose. As the RBA notes, "investors with redraw accounts cannot claim tax deductions on any withdrawn funds" used for private purposes. The tax saving from keeping an investment loan clean typically outweighs the annual package fees by a wide margin.
For owner-occupiers with a simple loan and no plans to ever rent the property, a redraw facility on a no-frills variable loan is usually the cheaper choice. The flexibility loss is modest if you have other savings available. If you want immediate access to your savings buffer, or if the property might become a rental in future, pay for the offset account from day one, converting later can trigger mixed-purpose problems on the loan. And if you already have an investment loan, an offset account is almost always the right answer.
Disclaimer: This article provides general information about mortgage offset accounts and redraw facilities and is not financial or tax advice. Individual outcomes depend on your lender, loan structure, and whether the property is owner-occupied or an investment. Refer to the ATO's rental property guidance and consider speaking with a qualified accountant for advice specific to your situation.