Redraw vs Offset: Pros and Cons + Tax Implications
Anthony Lawson
Strategic Lending Adviser
anthony@financialdnagroup.com.au
0414 744 516
Authorised Credit Representative No. 443815
A Redraw refers to a feature available on many Australian home and investment loans that allows you to withdraw (or “redraw”) any extra repayments you’ve made above the minimum required repayments.
How Redraw Works
When you make extra repayments on your home loan:
- Those extra payments reduce your loan balance (and interest charged)
- But they’re still accessible — you can “redraw” them if needed (e.g., for renovations, emergencies, investing)
Benefits of Redraw
- Interest savings: Extra repayments reduce your loan balance, saving interest over time
- Flexibility: You can access these funds later
- No tax implications: Redrawing from your own home loan for personal use is not taxed (but see traps below)
Redraw Traps
- Restricted access: Some lenders limit how much or how often you can redraw
- Online vs manual redraw: Some banks only allow redraws through certain channels
- Mixing personal/investment use: For investment loans, redrawing funds for personal use can compromise tax deductibility of the interest
- Offset vs Redraw: Funds in an offset account are more flexible and instantly accessible without affecting loan purpose, better for tax and liquidity
Tip for Property Investors:
Using your redraw facility from an investment loan for personal expenses can “taint” the loan, meaning part of the interest may no longer be deductible. In this case, an offset account is safer for tax integrity.
Offset Account
An offset account is a transaction account linked to your home or investment loan. The money in this account offsets your loan balance when interest is calculated.
How It Works:
If your loan balance is $500,000 and your offset account has $50,000, you only pay interest on $450,000.
Benefits of an Offset Account
| Feature | Offset Account |
|---|---|
| Interest Savings | Reduces interest by offsetting the balance daily |
| Full Access | Money is yours, deposit and withdraw freely like any bank account |
| Tax Efficiency | Ideal for investment loans, doesn’t “taint” deductibility if used properly |
| Flexible Structure | Can be used for budgeting, multiple accounts (in some cases) |
| No Need to Redraw | Funds remain liquid and do not require lender approval to access |
Offset Account Considerations
- No interest earned: You don’t earn interest; instead, you save interest on your loan
- Fees may apply: Some loans with offset accounts have higher fees or rates — compare carefully
- Discipline required: Avoid withdrawing offset savings unless necessary to preserve benefit
Offset vs Redraw: Quick Comparison
| Feature | Offset | Redraw |
|---|---|---|
| Access | Immediate & full | May be restricted or delayed |
| Tax Efficiency (investment loan) | Safe | Risk of tainting deductibility |
| Saves Interest | Yes | Yes |
| Ease of Use | Like a normal account | Sometimes clunky |
| Best for | Ongoing access + tax planning | Making extra repayments to reduce debt faster |
Pro Tip (especially for property investors):
Use an offset account to hold funds for future use (e.g., another deposit, renovation, emergency buffer). This keeps your interest tax-deductible on the original loan and avoids messy redraw history.
Tax and Offset vs Redraw – What You Need to Know
| Feature | Offset Account | Redraw Facility |
|---|---|---|
| How interest is calculated | Loan balance minus offset balance | Loan balance minus extra repayments |
| Is interest on the loan still deductible? | Yes, if the loan is for investment and not changed | Maybe not, if you redraw for personal use |
| What happens if funds are withdrawn? | No impact on tax deductibility | Taints the portion of loan used for private purposes |
| ATO scrutiny | Safer — no change to the original loan purpose | High risk — redraw changes the nature of loan use |
| Best for investment property loans? | Yes — keeps purpose and deductions clean | Only safe if redrawn for investment use again |
Example: Investment Loan Scenario
Offset Account
- $500,000 investment loan
- $100,000 in offset → Interest charged only on $400,000
- You can withdraw that $100k at any time, no tax issues, and loan remains fully deductible
Redraw Facility
- $500,000 investment loan
- You make $100k in extra repayments
- You redraw $50k later to buy a car (private use) → Now only 90% of the interest is deductible (because 10% of the loan is used for private purposes)
Key Tax Insight:
The ATO doesn’t care where you got the funds from, they care what you use them for. If you redraw for non-investment purposes, part of your loan becomes non-deductible and it can’t be “re-deducted” later.
General Recommendation
- Use offset accounts for storing funds you might need later — no tax consequences
- Use redraw only if you are disciplined and understand how your redraws affect deductibility
Scenario Setup
- Loan: $500,000 Investment Loan
- Property: Positively geared investment property
- Offset account: $100,000 cash
- Future goal: Use funds for a deposit on another investment or personal purchase (e.g., car, renovation)
Recommended Loan Structure (Split Loan Strategy)
| Loan Split | Amount | Purpose | Offset Attached? | Interest Deductible? |
|---|---|---|---|---|
| Loan Split A | $400,000 | Current investment property | Yes | Fully deductible |
| Loan Split B | $100,000 | Flexible future use | Yes | Deductibility depends on how funds are used |
Strategy:
- Park the $100k cash in Offset B (not against full loan) to reduce interest
- No extra repayments are made, so the loan’s original purpose stays clear
- If you need to withdraw $50k, spend it from the offset, not redraw, avoiding loan contamination
Why Not Just Use Redraw on a Single Loan?
If you put $100k into extra repayments and later redraw $50k for a personal holiday:
- 10% of your loan is now for private use
- You lose that portion of deductibility
- You’ll need to apportion interest going forward, often a record-keeping nightmare
ATO-Backed Rule of Thumb:
Tax deductibility is determined by the purpose of the borrowed funds, not where the funds came from.
- Offset = cash = your money → Spend it how you like, no tax issues
- Redraw = loan money → If used for personal purposes, deductibility is lost on that portion
Summary Tips:
- Use offsets for future flexibility
- Use loan splits to isolate investment purposes
- Never redraw from an investment loan for private expenses
- Consider personal budgeting around your offset to stay disciplined
I hope this information was helpful. If you need assistance, please contact me — I am here to help.