If you have a home loan, two features can save you significant interest over the life of the loan: offset accounts and redraw facilities. Both work by reducing the interest you pay on your loan, but they work differently — and the distinction matters enormously if you own investment properties.
What Is an Offset Account?
An offset account is a transaction account linked to your home loan. The balance in your offset account is “offset” against your loan balance for the purpose of calculating interest. So if you have a $500,000 loan and $50,000 in your offset account, you only pay interest on $450,000.
The money in the offset account remains fully accessible — you can spend it any time via EFTPOS, bank transfer, or BPAY. It functions just like a regular bank account, but every dollar in it saves you home loan interest.
What Is a Redraw Facility?
A redraw facility allows you to access extra repayments you’ve made on your home loan. If your minimum monthly repayment is $3,000 but you’ve been paying $3,500, you’ve built up $500/month in available redraw.
Like an offset account, the extra funds reduce your loan balance and therefore reduce the interest you’re charged. But unlike an offset, they’re technically part of your loan — not a separate account — and the lender may have policies around how and when you can redraw.
Which Is Better for Owner-Occupied Loans?
For a simple owner-occupied home loan where you don’t plan to convert the property to an investment in the future, both work similarly. Offset accounts give you slightly more flexibility and visibility, but redraw can also be effective if your lender offers generous redraw terms at no cost.
Why This Distinction Is Critical for Investors
Here’s where the difference becomes genuinely important. If you plan to turn your current home into an investment property in the future, you should use an offset account — never redraw — for your savings.
Here’s why: if you redraw from your home loan (even for personal use), the ATO can determine that the “new” debt is not for an income-producing purpose and therefore not tax-deductible. This is called “loan contamination” and it can permanently reduce the deductibility of your investment loan interest.
With an offset account, your savings sit separately from the loan — so when you move out and the property becomes an investment, your full loan balance remains deductible. The offset account funds can be withdrawn for personal use (e.g. to fund a deposit on your new home) without affecting the tax deductibility of the loan.
The Real-World Impact
Imagine you have a $600,000 home loan and you’ve built up $100,000 in extra repayments via redraw. When you decide to move and rent out the property, your outstanding loan balance is only $500,000 — but you’ve contaminated your ability to claim deductions on the full original debt. In contrast, with an offset account strategy, your loan balance remains at $600,000 (fully deductible), while your $100,000 is accessible in the offset account.
The difference in tax deductions over the life of the loan can be $30,000–$50,000+.
Talk to Assembly Finance About Your Loan Structure
Understanding the nuances of loan structure is exactly where a specialist mortgage broker adds enormous value. At Assembly Finance, we help clients set up their loans correctly from the start — saving them significant money in both interest and tax over the long term.
