Offset Accounts vs. Redraw Facilities: The Strategic Choice for Australian Investors

For many Australian borrowers, the path to financial freedom isn’t just about securing a low interest rate; it is about how you structure your debt. When you are looking to pay off your home sooner or maximise tax efficiencies for an investment portfolio, two features dominate the conversation: the Offset Account and the Redraw Facility.

While they may appear to achieve the same result—lowering your monthly interest bill—they are fundamentally different financial tools. For property investors and business owners specifically, mistaking one for the other can lead to costly tax errors and “contaminated” loans.

At SBS Lending, we believe in empowering you with the knowledge to make savvy decisions. Here is a deep dive into the mechanics, benefits, and risks of these two distinct mortgage features.

The Mechanics: How They Save You Money

To understand the strategy, you must first understand the calculation. Both offset accounts and redraw facilities work on the principle of reducing the principal amount upon which the bank calculates your daily interest.

If you have a $500,000 mortgage and $50,000 in surplus cash, both options effectively treat your loan balance as $450,000 for interest calculation purposes. However, where that money sits and how you access it differs significantly.

The Offset Account: A Separate Entity

An offset account is a transaction or savings account that is linked to your mortgage but sits separate from it. It functions like an everyday bank account with a BSB and Account Number.

Liquidity: You can use a debit card, perform transfers, and pay bills directly from this account.
Interest: You do not earn interest on these savings (which means no tax to pay on interest earned). Instead, you save interest on your mortgage at the home loan rate, which is almost always higher than a savings rate.

The Redraw Facility: Pre-payments on the Principal

A redraw facility is not a separate account. It represents the pool of extra repayments you have made strictly *into* the loan, above your minimum contractual requirements.

Structure: The money sits inside the loan account, technically reducing the debt owed to the bank.
Access: To use this money, you must apply to “redraw” it, moving it from the loan account back to a transaction account.

The Investor’s Trap: Tax Implications and Loan Contamination

This is the most critical section for property investors and first home buyers who plan to upgrade and rent out their current home later (“rent-vestors”).

While redraw facilities are often fee-free, they pose a significant risk regarding tax deductibility due to how the Australian Taxation Office (ATO) views the “purpose of funds.”

The Risk of Redraw

When you put money into a redraw facility, the ATO views this as paying down the principal debt. The debt has effectively been reduced.

If you later decide to pull that money out (redraw) to buy a car or pay for a holiday, the ATO views this as new borrowing. Because the purpose of this new borrowing is personal (a car or holiday), the interest on that specific portion of the loan is no longer tax-deductible.

This creates a “contaminated loan”—a mix of deductible (investment) and non-deductible (personal) debt. Unravelling a contaminated loan is an accounting nightmare and can cost you thousands in lost tax deductions.

The Power of Offset

Because an offset account is a separate vessel, putting money in or taking it out does not alter the underlying loan balance; it only alters the interest charged.

If you remove $50,000 from your offset account for a personal purchase, the interest on your investment loan increases, but the loan itself remains 100% tax-deductible (assuming the original loan was for investment purposes). For this reason, savvy investors almost universally prefer offset accounts to preserve the integrity of their tax-deductible debt.

Flexibility and Control: Which Fits Your Lifestyle?

Beyond tax, the choice often comes down to your cash flow needs and spending psychology.

Choose an Offset Account If:

You run a business: You need to park tax or GST money temporarily. You can leave it in the offset to save mortgage interest, then pay the ATO when due without hassle.
You need high liquidity: You want instant access to your cash via ATMs or online banking without logging in to move funds.
You are a future investor: You are buying a home to live in now but plan to rent it out later. An offset allows you to hoard cash to buy your next home while keeping the debt on the first property high (maximising future tax deductions).

Choose Redraw If:

You want to minimise fees: Offset accounts usually come with an annual “Wealth Package” fee (often around $395). Basic loans with redraw are often fee-free.
You lack discipline: If having $20,000 accessible on a debit card is too tempting, a redraw facility adds a layer of friction. The extra step required to transfer the money can act as a psychological barrier to impulsive spending.
The loan will never be an investment: If this is your forever home and you simply want to pay it off and never claim tax deductions on the interest, redraw is a cost-effective solution.

The Verdict: Context is Key

There is no single “better” product, only the right strategy for your specific horizon.

If your goal is strictly to pay off your owner-occupied home with zero fees and no intention of turning it into a rental, a basic loan with redraw is efficient. However, if you are building a property portfolio, own a business, or value maximum flexibility, the tax benefits and liquidity of an offset account far outweigh the annual package fees.

Are you structuring your loans to work as hard as you do?

Navigating the nuances of loan features requires a tailored approach. At SBS Lending, we analyse your long-term financial roadmap to ensure you aren’t just getting a loan, but a strategy.

Disclaimer

The information provided in this blog is intended for general informational purposes only and should not be construed as legal, financial, or business advice. While we strive to provide accurate and up-to-date information, every business and individual’s situation is unique. Therefore, we strongly recommend seeking professional legal or financial advice tailored to your specific circumstances before making any decisions. Relying solely on the content of this blog without expert guidance may expose you to legal or financial risks.

References

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