Offset Accounts vs. Redraw Facilities

Both of them save you exactly the same amount of interest. If you have a $500,000 loan and $50,000 in spare cash, using either an offset or a redraw means you only pay interest on $450,000.

However, they operate entirely differently behind the scenes, and misunderstanding this difference can trigger a massive tax headache if you ever decide to rent out your property.

The Offset Account: The Separate Bucket

An offset account is simply a regular, everyday transaction account that is linked to your mortgage.

• How it works: Your $50,000 sits in a separate bucket next to your loan. The bank looks at both buckets daily and only charges you interest on the difference.
• The Benefit: You never actually paid the loan down. The loan balance is still officially $500,000, but your money is working for you. You can spend that $50,000 at the supermarket with a debit card without asking the bank for permission.

The Redraw Facility: The Trapdoor

A redraw facility is not a separate bank account. It is a feature inside your loan.

• How it works: When you put $50,000 into a redraw facility, you are officially making an extra repayment and reducing the actual balance of your loan down to $450,000.
• The Benefit: You can usually "redraw" (take back) that $50,000 later if you need it, pushing the loan balance back up to $500,000.

The Massive Tax Trap (The "Purpose Test")

If you live in the house forever, the difference between the two doesn't matter much. But if you ever turn that house into an investment property and rent it out, the Australian Taxation Office (ATO) rules come into play.

When a house becomes an investment, the interest you pay on the loan becomes tax-deductible. But the ATO has a strict rule: The deductibility of a loan depends on the purpose of the borrowed funds.

Here is what happens if you take your $50,000 back out to buy a new car or go on a holiday:

• If you take it from an Offset Account: The ATO says, "You just spent your own savings from your own bank account. Your original $500,000 loan was for the house, so the interest on the full $500,000 remains tax-deductible."
• If you take it from a Redraw Facility: The ATO says, "You previously paid the loan down to $450,000. By redrawing $50,000, you have taken out a brand new loan for a car/holiday. Because a car is a personal expense, the interest on that $50,000 is __not__* tax-deductible. You just contaminated your investment loan."*

The Golden Rule: If there is any chance you might turn your home into an investment property in the future, you should park your extra cash in an Offset Account, not a Redraw Facility, to protect your future tax deductions.

Interactive: Offset vs. Redraw Tax Simulator

Planning to rent out your current home eventually? See how pulling cash out of a Redraw for personal use "contaminates" your tax deductions compared to using an Offset.

General Advice Warning: The information provided here is for general educational purposes only. It does not take into account your personal financial objectives, situation, or needs. Before making any financial decisions, please consider the appropriateness of the information and consult with a licensed financial adviser.