An offset account is a transaction account linked to a loan, where the balance reduces the interest charged while the money stays yours. Redraw lets you take back extra repayments you have made into the loan. Both lower interest by the same amount. The difference is that redrawn money is new borrowing, and offset money is savings.
On episode 109 of the podcast, Dion made the point in a sentence: looking only at the loan balance, the two can appear the same, and the consequences can be very different when the money is later used for investment.
How do offset and redraw compare?
| Offset account | Redraw | |
|---|---|---|
| What it is | A separate account linked to the loan | Extra repayments held inside the loan |
| Whose money | Your savings | The lender’s, once repaid. Taking it back is borrowing |
| Loan balance | Stays the same | Goes down, then up again when redrawn |
| Interest saved | On the offset balance | On the extra repaid |
| Access | Like a bank account | On the lender’s terms, which can change |
| If used for another purpose | The loan’s purpose is unchanged | Can change the purpose of that part of the debt |
| Cost | Often a package fee or a higher rate | Often included |
ASIC's Moneysmart notes that loan features such as an offset account or redraw may come at a cost, and suggests weighing whether you will use them enough to justify it (ASIC Moneysmart).
Why does it matter whose money it is?
Because of what happens when it moves. Funds in an offset account are your savings, held beside the loan. Withdrawing them is spending your own money. The loan was never repaid, so nothing about it changes.
Money paid into a loan has repaid part of the debt. Drawing it back out through redraw is new borrowing. If that redrawn money is used for something different from the original loan, an investment for example, it can change the purpose of that part of the debt.
Why can redraw create problems for investors?
Loan purpose is what makes a debt easy or difficult to trace. When private and investment purposes become mixed inside one loan, working out which portion was used for what becomes harder, and that can complicate the deductibility of interest.
A common example is a home that later becomes a rental. An owner who paid the loan down and then redrew for private spending has a loan that is partly for the property and partly for other things. An owner who kept the same savings in an offset account still has the original loan intact. The balances can look alike. The records do not.
This is general information, not tax advice. How it applies to your loans is a question for your accountant, ideally before the money moves.
Prefer to start with the framework? Download the free Portfolio Blueprint →
When is redraw perfectly fine?
- On a home you will always live in. Where no part of the debt is ever likely to be for investment.
- When the redraw is for the same purpose. Further work on the same property, for example.
- When simplicity and a lower cost matter more. A basic loan with redraw can be cheaper than a package with offset.
- When having savings out of easy reach helps. Some people prefer the discipline.
When does offset earn its cost?
- When the home may become an investment. Keeping the loan balance intact preserves the original debt.
- When you are building funds for a deposit. Savings stay yours, separate and ready.
- When you hold a buffer against an investment loan. Interest is reduced without permanently repaying the debt. See interest-only vs principal and interest.
- When you want certainty of access. Redraw is available on the lender's terms. An offset account is your account.
Not every loan offers a full offset, and fixed-rate loans often restrict or exclude it. The cost has to be weighed against how much you will hold there.
How does this fit the wider structure?
Offset and redraw are features. The structure is the set of decisions around them: which debts are split by purpose, which are interest-only and where spare cash is directed. An offset account against the right loan supports strategies such as debt recycling. Against the wrong loan it does much less.
Where a loan is already mixed, a restructure into separate loan splits can make the position clearer from that point. It does not rewrite what has already happened, which is why the order matters: structure first, then the money moves.
What should you check on your own loans?
- Whether each loan has an offset account, redraw or both.
- Whether you have ever redrawn, and what the money was used for.
- Whether any property might change use, from home to rental or the reverse.
- Where your savings sit today, and whether that is by design.
- What the feature costs each year against what it saves.
Common questions
What is the difference between offset and redraw?
An offset account is a separate account linked to your loan, and the balance reduces the interest charged while remaining your savings. Redraw lets you take back extra repayments made into the loan. Taking money out of redraw is new borrowing, while taking money from offset is not.
Is offset better than redraw for an investment property?
Often, because money in an offset account stays separate from the debt, which keeps the purpose of the loan clear. Redrawing for a different purpose can mix purposes within one loan. Which suits you depends on your plans and costs, and the tax side is a question for your accountant.
Does redraw affect tax deductions?
It can. If redrawn funds are used for a different purpose from the original loan, the loan can become mixed purpose and interest may need to be apportioned. This is general information only. Ask your accountant how it applies to your loans.
Do offset and redraw save the same amount of interest?
On the same balance and rate, yes. Both reduce the amount on which interest is calculated. The difference is in cost, access and what happens when the money is taken out again.
The takeaway
Offset and redraw save the same interest. They leave different records. For anyone who may invest, or whose home may one day be rented, the choice is about keeping savings and debt separate before the money moves.
If you want your loans checked against your plans, Book a Call. Fifteen minutes with the team will tell you whether your structure keeps the next move simple.
This article is general information only. It does not take your individual circumstances into account and is not credit, tax, legal or financial product advice. All lending is subject to individual assessment and lender criteria. Speak with your own advisers before acting. The tax treatment of redraw, offset and loan purpose is a matter for your accountant.