Offset Account vs Redraw: Which Is Better for Your Mortgage?
On interest they can save you exactly the same amount. They are not the same thing, and the difference is not really about convenience. Money in an offset is still your money. Money in redraw, in the Commissioner’s own words, has ceased to exist as an asset of the borrower. Everything that matters follows from that one sentence.
The short answer
Both reduce the interest you pay by lowering the balance interest is calculated on, and for the same amount of money the saving can be identical. The difference is what the money legally is. An offset is a separate deposit account holding your own funds alongside the loan. Extra repayments in a redraw have been used to discharge debt, so they are no longer your asset, and taking them back out is a fresh borrowing whose deductibility depends on what you spend it on. For an owner-occupier who will never invest, either works. If there is any chance the home becomes a rental, an offset is generally the safer structure, because a single personal redraw permanently fixes a non-deductible proportion to the loan that you cannot repay preferentially and that follows the loan for its entire life. Interest deductibility is a question for your accountant, not your broker.
How an offset account works
An offset account is a transaction or savings account linked to your home loan. Its balance is subtracted from your loan balance before interest is calculated each day.
If your loan balance is $600,000 and you hold $40,000 in the offset, the lender charges interest on $560,000. You earn no interest on the $40,000, but you are effectively earning your mortgage rate on it, and because that benefit arrives as interest saved rather than interest received, there is no tax on it. The money stays fully accessible like any everyday account.
That “you earn no interest” part is not the bank being mean. It is a condition of the tax treatment. The Commissioner’s ruling on offset arrangements is explicit that for a dual-account offset to be acceptable there must be no entitlement, in law or in equity, to receive interest on the deposit account. If you did earn interest on the balance, that interest would be assessable income to you and the arrangement would stop being an offset in the relevant sense. The whole benefit is delivered as a reduction in what you owe, which is precisely why it is not taxed.
A worked illustration, using assumed figures
On a $650,000 loan at an assumed 6 per cent a year, daily interest is about $106.85. Hold $50,000 in an offset and interest is charged on $600,000, or about $98.63 a day. The difference is roughly $8.22 a day, which is about $3,000 across a year if that balance is maintained the whole time.
These are simplified figures chosen to show the mechanic. They are not a quote, a rate offer or a prediction, and your actual position depends on your real daily balances, your rate, any fees and how long balances are held.
How a redraw facility works
A redraw facility is not an account. When you pay more than your minimum repayment, those extra funds reduce your outstanding loan balance and therefore your daily interest. The facility gives you the ability to take some of that money back later.
Most people picture this as money parked inside the loan. On the interest arithmetic that picture works fine, and for the same sum the saving matches an offset. On what the money actually is, the picture is wrong, and that is where the consequences live.
Access also varies more than people expect. Some lenders cap how much you can redraw, some charge a fee, and some delay access. As ASIC’s Moneysmart puts it, how and when you can get to the funds depends on your loan terms, which is a materially weaker position than holding your own money in your own account.
Where the money legally goes
This is the section that makes the rest of the page make sense, and it is the part almost every comparison skips.
The Commissioner addressed the “parked in the loan” idea directly in Taxation Ruling TR 2000/2, and rejected it. The ruling states that it is not correct to treat a reduced loan balance as though the extra repayments were sitting to the borrower’s credit in a separate account with the lender. Extra repayments do not create a debt owed by the lender back to you. In the ruling’s own words, those funds simply cease to exist as an asset of the borrower after being used to discharge part of the loan debt.
Money you put into redraw has not been stored. It has been spent, on paying down your own debt. What the facility gives you back is not your savings. It is a contractual right to borrow again.
The same ruling notes that repaying principal gives the borrower a contractual right to borrow a further amount up to the limit, and that the redraw facility does not involve the separate loan and deposit accounts described in the Commissioner’s earlier ruling on offset arrangements, TR 93/6.
So the 2 products differ at the level of what exists:
- Offset. Two things exist. A loan you owe, and a deposit account holding your money. Withdrawing from the offset spends your own funds. The loan is untouched, and nothing about its purpose changes.
- Redraw. One thing exists. A loan, smaller than it was. Redrawing increases it again, and that increase is a new borrowing, characterised for tax purposes by whatever you do with the money.
Everything below is a consequence of that distinction rather than a separate fact to remember.
Side by side
| Feature | Offset account | Redraw facility |
|---|---|---|
| Reduces daily interest | Yes | Yes |
| What it is | A separate deposit account | Extra repayments already applied to the loan |
| Whose asset the money is | Yours, held in your account | Nobody’s, the debt was discharged |
| Taking money out is | Spending your own savings | A new borrowing |
| Access | Immediate, like any account | Subject to your loan terms, may be capped, delayed or charged |
| If the home becomes a rental | Loan purpose unaffected by withdrawals | Personal redraws create a permanent mixed-purpose loan |
| On fixed rate loans | Often unavailable or partial only | Available on most loan types |
| Cost | Often a package fee or slightly higher rate | Usually free, though some lenders charge |
| Everyday transaction use | Yes | No |
The tax consequence, and why it cannot be undone
Most articles get as far as “a redraw for personal use can affect your deductions” and stop. The reason that sentence understates the problem is the word “permanent,” and the Commissioner’s own worked example shows why.
The ATO’s published example runs like this. Tyler has an investment loan with a redraw facility and is $9,500 ahead. Halfway through the year he redraws the $9,500 and buys a television and a lounge suite. His loan balance after the redraw is $365,000. The rental portion is $365,000 less $9,500, being $355,500, and the deductible share of the interest from that point is calculated on the ratio between them. He ends up able to claim $18,748 of $19,000.
Losing $252 of deductions in one year is not the interesting part. This is:
The ratio between the deductible and private components of the loan is 97.4 per cent and 2.6 per cent. Tyler must continue to apportion interest and repayments of principal in accordance with this ratio for the life of the loan.
Read that again with the word “repayments” in view. The ATO’s guidance on loan accounts used for both private and rental purposes puts it plainly: you cannot repay only the portion of the loan that relates to your private purchases, and all loan repayments must be apportioned across both portions for the length of the loan.
So Tyler cannot pay off the television. Every principal repayment he makes for the next 25 years is split 97.4 to 2.6, chipping away at the deductible and non-deductible parts in lockstep, forever. A single afternoon’s shopping has permanently attached a non-deductible fraction to a $365,000 loan, and there is no repayment schedule that removes it. The apportionment itself then has to be calculated month by month on the basis set out in the ruling and carried through every return for the life of the loan.
Now compare the offset. You withdraw $9,500 from your offset account and buy the same television. Your loan balance does not move, because nothing was borrowed. Your interest goes up, because your offset balance went down. Your loan’s purpose is untouched, and so is your deduction. The television cost you a television.
That is the whole case, and it is why this is a structural decision made at the start rather than a preference you can revisit later. It matters especially in Penrith and across Western Sydney, where keeping the first home as a rental while upgrading is a common path rather than an exotic one.
Security is not purpose
While we are here, the single most common misconception in this area, and it costs people more than the offset decision does.
Deductibility follows what the borrowed money was used for. It does not follow what the loan is secured against. The ATO’s own example makes the point: a couple borrow $400,000 secured against their existing home to buy a new one, then rent the old home out. The interest on the $400,000 is not deductible, because the money bought a home they live in, even though the loan is secured against the property producing the rent. The small remaining mortgage on the original home is deductible, because that money bought the property now earning rent.
People get this backwards constantly, usually in the form of “I’ll just use the investment property as security, then it’s an investment loan.” The security has nothing to do with it. Only the use of the funds does.
When an offset is not a full offset
One more thing worth knowing before you choose a product on the strength of the word “offset” appearing in its name.
The interest saving from an offset is only identical to redraw when the offset is a 100 per cent offset. The Commissioner’s ruling on offset arrangements also contemplates a partial structure, where a reduced rate of interest, often the lending rate less a deposit rate, is charged on an amount equal to the deposit balance, rather than that amount being taken out of the interest calculation entirely. Under a partial offset your money is working at less than your loan rate, and the equivalence to redraw quietly disappears.
Partial offsets turn up most often attached to fixed rate loans, which is also where “offset available” appears in marketing with the least explanation. If a product advertises an offset, the question worth asking is whether it offsets 100 per cent of the balance, whether it applies to the whole loan or only the variable portion, and what the package fee is.
On that last point, Moneysmart’s guidance is worth repeating because it is the one piece of arithmetic people skip: if your offset balance is always low, for example under $10,000, the feature may not be worth paying for. An offset earning you your mortgage rate on a small balance loses to a package fee quite easily. Run that comparison before you buy the feature, not after.
Which one is right for you
There is no universal winner. Treat the following as general orientation rather than a recommendation, which depends on your full circumstances.
| An offset tends to suit | A redraw tends to suit |
|---|---|
| Anyone who might turn the home into a rental, at any point | People confident the property will never produce income |
| Borrowers running salary and spending through the account | Borrowers who want the simplest and often cheapest loan |
| People who want their savings to remain their own asset | People happy for savings to sit inside the loan |
| Anyone holding a balance large enough to beat the package fee | Anyone whose spare balance is usually small |
| Borrowers on, or wanting, a variable rate | Borrowers who want the feature on a fixed rate loan |
A common middle path is a split loan: one portion fixed for repayment certainty, one variable with a full offset attached. That preserves the offset structure on the part of the loan where your savings actually sit while giving you rate certainty on the rest, and it is worth structuring deliberately rather than accepting whatever a single lender happens to package together. Adding or changing these features is one of the more common reasons to refinance or restructure.
Getting more out of whichever you choose
A few habits do most of the work.
- Have your salary land in the offset. Interest is calculated daily, so even a few extra days at a higher balance is a real saving.
- Keep everyday spending flowing through it and pay bills later in the month, which keeps the balance higher for longer.
- Consider a credit card for day-to-day spending, cleared in full every month. This holds the offset balance up through the month. It only works if you genuinely clear it, because carrying a card balance costs far more than the offset saves.
- Compare repayment frequency. Paying half your monthly amount fortnightly means 26 fortnights a year, which is the equivalent of an extra month’s repayment. Check with your lender that extra repayments are allowed and whether fees apply.
- Do not redraw for personal spending if there is any prospect of the property producing income later. This is the one that cannot be fixed afterwards.
- Review the loan annually. Rates and circumstances drift, and a structure that suited you at settlement may not suit you 3 years later.
If your circumstances are already investment-shaped, the structure question widens considerably, and our investment loans page covers where deductibility and loan structure interact. If you are weighing up how much room you have before restructuring, our guide to how much you can borrow covers capacity.
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Frequently Asked
Offset vs Redraw FAQs
What borrowers ask most about loan structure.
What is the difference between an offset account and a redraw facility?
An offset is a separate deposit account linked to your loan, and its balance is subtracted from the loan balance before daily interest is calculated. A redraw is not an account. It is the extra repayments you have already made, which reduced the loan, with the ability to borrow that amount again. The interest saving for the same sum can be identical. The difference is that offset money remains your asset, while money used to make extra repayments has discharged debt and is no longer yours to withdraw, only to re-borrow.
Which saves more interest, offset or redraw?
For the same amount of money against the same loan, a full 100 per cent offset and a redraw save the same interest, because both reduce the balance interest is calculated on. Two things can break that equivalence. A partial offset offsets your balance at less than the full loan rate, and a package fee on the offset can outweigh the saving if your balance is usually small. Compare the fee against the balance you realistically hold.
Why does offset matter for tax if I might invest later?
Because interest deductibility follows what borrowed money was used for. Withdrawing from an offset spends your own savings, so it is not a borrowing and the loan’s purpose is unchanged. Redrawing is a fresh borrowing, so if you spend it on something personal, that portion of the loan becomes non-deductible once the property is producing income, and the loan becomes mixed purpose. This is general information and your accountant should confirm your position.
Can I fix a redraw problem by paying the money back?
Not simply, and this is the part most people underestimate. The ATO’s guidance is that you cannot repay only the private portion of a mixed-purpose loan, and that all repayments must be apportioned across both portions for the length of the loan. In the Commissioner’s published example the deductible and private split is fixed at 97.4 and 2.6 per cent and must be applied to interest and to principal repayments for the life of the loan. Restructuring options may exist, but they are a conversation for your accountant and your broker together, before the property is rented rather than after.
My loan is secured against my investment property. Isn’t the interest deductible?
No, and this is the most common misunderstanding in the area. Deductibility follows the use of the borrowed funds, not the security. The ATO’s own example covers a loan secured against a rental property but used to buy a new home to live in, and the interest on it is not deductible. Using an income-producing property as security does not make a personal borrowing an investment borrowing.
Can I have both an offset account and a redraw facility?
On many variable loans, yes, and plenty of borrowers do. The practical guidance is to keep spare cash in the offset and treat the redraw as untouched, because that keeps your accessible savings clearly separate from the loan. Availability and terms differ by lender and product, so confirm the specifics of any loan before relying on them.
Is an offset account available on a fixed rate loan?
Sometimes, but often only as a partial offset, and sometimes not at all. This is why a split loan is a common structure: a fixed portion for repayment certainty and a variable portion carrying a full offset where your savings actually sit. If a fixed product advertises an offset, ask specifically whether it offsets 100 per cent of the balance and whether it applies across the whole loan.
Why don’t I earn interest on my offset balance?
Because earning interest would change the tax treatment. The Commissioner’s ruling on offset arrangements requires that there be no entitlement to receive interest on the deposit account for the arrangement to be an acceptable offset. If you earned interest, it would be assessable income. Delivering the whole benefit as a reduction in interest charged is what keeps it untaxed, which is why an offset is generally worth more than a savings account paying a comparable rate.
Can a lender restrict my redraw access?
Access depends on your loan terms. Moneysmart notes that some lenders limit how much you can redraw or charge a fee, and others may delay access to the funds. That is a different position from holding your own money in your own deposit account, and it is worth checking the terms before you rely on redraw as your emergency fund.
Does an offset account cost more?
Often, either through a package fee or a slightly higher rate. Whether that cost is worth paying depends on the balance you actually hold. Moneysmart suggests that if your offset balance is always low, for example under $10,000, the feature may not be worth paying for. Work out your realistic average balance, calculate what it saves at your rate, and compare it to the annual fee before deciding.
When should I speak to a broker about loan structure?
Before settlement is the cheapest moment, because the structure is being set anyway. The second best moment is now, whatever your situation, particularly if your plans have changed since the loan was written or if you are considering keeping a property and buying another. A broker structures the loan features. Your accountant confirms the tax outcome. Those are 2 different jobs and the useful version of this conversation involves both.
The bottom line
On interest alone it is close to a tie. The same money against the same loan saves the same amount, assuming a full offset and no fee eating the difference.
The decision is not really about interest. It is about what the money is. Offset money is yours, sitting in an account, and spending it is spending savings. Redraw money was used to extinguish debt and no longer exists as your asset, so taking it back is borrowing, and borrowing is characterised by what you do with it. From that single distinction comes everything else: the access differences, and the fact that one personal redraw can permanently fix a non-deductible proportion to a loan you will be apportioning for the next 25 years.
For an owner-occupier who is certain the property will never produce income, redraw is simple and usually cheaper and there is nothing wrong with it. For everyone else, and particularly in a part of Sydney where keeping the first place as a rental is a normal way to upgrade, an offset buys you optionality that cannot be bought back later at any price.
Get it right at settlement. The interest arithmetic is the easy part.
Joseph Sukkar
Joseph has worked in Australian finance for more than 25 years and has run Intellect Finance from central Penrith since 2005. Loan structure is the part of the job with the longest tail, because a feature chosen badly at settlement is usually discovered years later by an accountant. Intellect Finance charges clients no fee on any loan type. More about the team.
Sources
Australian Taxation Office, Taxation Ruling TR 2000/2, Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities, for the finding that extra repayments do not create a debt owed by the lender to the borrower and cease to exist as an asset of the borrower once used to discharge loan debt, that a redraw is a new borrowing characterised by its use, that a redraw facility does not involve the separate loan and deposit accounts described in TR 93/6, and for the monthly apportionment method at paragraphs 19 and 20. ato.gov.au
Australian Taxation Office, Taxation Ruling TR 93/6, Income tax and fringe benefits tax: loan account offset arrangements, for the structure of an acceptable dual-account offset arrangement, the requirement that there be no entitlement in law or equity to receive interest on the deposit account, the treatment of any such interest as assessable income, and the description of partial offset arrangements charging a reduced rate on an amount equal to the deposit balance. ato.gov.au
Australian Taxation Office, Rental expenses: interest expenses, last updated 21 May 2026, for the published redraw example and its 97.4 and 2.6 per cent apportionment continuing for the life of the loan, the rule that repayments cannot be applied only to the private portion and must be apportioned for the length of the loan, and the example confirming that a loan secured against a rental property but used to buy a home to live in is not deductible. ato.gov.au
ASIC Moneysmart, Pay off your mortgage faster, last updated 9 September 2026, for the offset mechanic, the guidance that a persistently low offset balance may not justify paying for the feature, the note that lenders may limit redraw amounts, charge fees or delay access depending on loan terms, and the fortnightly repayment arithmetic. moneysmart.gov.au
Important disclosures, general advice warning and licensing
General information only. This article is general information only and does not constitute financial, credit, legal or tax advice. It does not take your personal or financial circumstances into account. Before acting on any information here, consider whether it is appropriate to your objectives, financial situation and needs.
Tax is your accountant’s domain. The tax material on this page describes general principles drawn from published ATO rulings and guidance as at the dates stated. It is not tax advice and it is not a substitute for advice about your own position. The deductibility of interest depends on your specific circumstances and on how funds are actually used over time, and the application of these principles to any particular loan is a matter for a registered tax agent or accountant. If you have already redrawn from a loan for personal purposes, or you are considering converting a home into a rental, get advice before acting rather than after. A broker structures loan features. Only your accountant can confirm a tax outcome.
About the rulings cited. TR 2000/2 and TR 93/6 are public rulings of the Commissioner of Taxation. They are described here in general terms and summarised, not reproduced, and the rulings themselves govern. Rulings and ATO guidance can be amended, withdrawn or superseded, and the examples described are the Commissioner’s own illustrations rather than outcomes that will apply to your situation. Positions are stated as reviewed on 10 September 2026.
Figures are illustrative. The interest figures and worked examples on this page are simplified illustrations using assumed numbers to demonstrate how the features work. They are not a quote, a rate offer, a prediction or a promise of any particular saving. Actual outcomes depend on your real balances, your rate, fees and how long balances are held. This page names no lenders and does not publish any lender’s interest rates.
Product features and fees vary. The availability of offset and redraw, whether an offset is full or partial, any fees, access conditions and how each feature works differ between lenders and products, are subject to each lender’s own policy, and can change. Lenders may limit, delay or charge for redraw access depending on your loan terms. Confirm the specifics of any product directly before relying on them.
Lender policy varies and changes. Descriptions of common practice are general observations rather than any lender’s policy. No broker can guarantee approval, pricing, a product feature or a timeframe.
Best Interests Duty. A home loan for a property you will live in is regulated consumer credit under the National Consumer Credit Protection Act 2009, and Best Interests Duty applies.
What we charge you. Nothing, on any loan type. No arrangement fee for residential, commercial, corporate, asset, SMSF or personal lending, no fee for complex or specialist lending, and no clawback recovery fee if a loan is discharged early. Lenders pay us a commission on settlement, disclosed to you in writing in our Credit Guide before we provide credit assistance.
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Intellect Finance Pty Ltd holds Australian Credit Licence 390611 and is a member of the MFAA and AFCA. Lending criteria, fees and terms apply. Article checked 10 September 2026.
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