Offset vs Redraw: The Hidden Difference That Matters When Your Home Becomes an Investment

For most borrowers, the choice between a redraw facility and an offset account feels trivial. Both aim to reduce the interest you pay on a home loan (put extra money into your loan now, pay less interest later).

Day to day, the interest savings delivered by offset and redraw can look almost identical. Yet beneath that similarity sits a structural difference that becomes critical the moment your home turns into an investment property. The way you use redraw today can change the amount of interest you are legally allowed to claim as a tax deduction once the property becomes an investment.

This is the part lenders might forget to explain. But for anyone who might upgrade homes down the track and keep their first property as an investment, understanding the split between offset and redraw is essential.

How Redraw Actually Works

A redraw facility lets you pay more than your minimum monthly loan repayment, pushing your loan balance down faster. Pay an extra $500 this month, another $300 the next, and over time you build up a buffer of “available redraw”. You can withdraw this money later – but critically, the extra money becomes part of your loan the moment you pay it in.

If your loan is $500,000 and you make $20,000 in extra repayments, the loan isn’t treated as $500,000 minus $20,000. It is $480,000. The original loan is permanently reduced until you withdraw those funds.

This matters because every dollar placed into redraw is recorded as a repayment of debt used to buy your home. And every dollar you take back out is treated by the ATO as a new borrowing with a new purpose.

If you spend that redraw on a car, travel, renovations on another property, or school fees, you have effectively taken out a new loan for that purpose – even if the transaction took twenty seconds in your mobile banking app. From a tax perspective, redraw creates a new loan fragment every time you withdraw.

Most people never notice this while the property remains their home. But the moment it becomes an investment property, that record of repayments and withdrawals suddenly becomes the centre of the story. For example, if you withdraw $30,000 from redraw for a car. When the home becomes an investment property later, the interest on the original portion of the loan remains deductible, but interest on that $30,000 is not deductible at all

You now have a “mixed-purpose loan,” meaning every repayment must be split between deductible and non-deductible portions.

How Offset Actually Works

An offset account looks like a regular transaction account, but it sits beside your home loan rather than inside it. Money in offset reduces the loan’s interest calculation, but it never becomes part of the loan.

If your loan is $500,000 and you hold $50,000 in offset, the bank does not charge interest on the entire $500,000. Instead, it charges interest on $450,000. But – and this is the crucial distinction – the loan itself remains $500,000 (that’s because the $50,000 is held in a separate account).

The money in offset is always yours. Withdraw it, and you have simply moved your cash out of your linked account. No change occurs to the loan’s structure, purpose, or tax status. The ATO sees no new borrowing, no repayment reversal, no mixed use.

This is what makes offsets particularly powerful: they reduce interest like redraw, but they never tangle the loan’s history.

Why This Difference Matters When the Property Becomes an Investment

When a property shifts from a home to an investment, the interest on the loan becomes tax-deductible. But – and this is the rule that governs everything – deductibility only applies to the portion of the loan that was originally used to buy the property.

With a redraw facility, the loan you end up with after years of repayments and withdrawals may be very different from the loan you began with.

Imagine a borrower pays $40,000 in extra repayments over several years and later withdraws $25,000 for a car and holiday. When the property becomes an investment, only the portion of the loan tied to the original house purchase is deductible. The $25,000 redraw – which the ATO sees as a fresh loan for non-investment purposes – is not deductible.

This forces the borrower to apportion the loan every year. A percentage of their interest becomes deductible; the rest is not. Over time, this diluted deductibility erodes the tax benefit of owning an investment property and can cost thousands of dollars annually.

Offset accounts avoid this problem entirely. Because offset money never becomes a repayment, the loan used to buy the property always stays intact. Nothing in an offset account changes the loan’s tax purpose. When the home becomes an investment, the entire loan remains deductible.

For accountants, this difference is so significant that many recommend borrowers use offsets exclusively if there is even a 10 per cent chance they might one day rent out their home.

The Real Cost of a Mixed-Purpose Loan

A mixed-purpose loan – created when redraw withdrawals are used for non-property expenses – becomes an administrative burden. Each year, the borrower or their accountant must calculate the proportion of the loan used to purchase the property versus the portion used for other expenses. Interest must be split according to that ratio.

This ratio changes every time the borrower makes a repayment. It changes every time they redraw money. It changes if they refinance. It changes if they switch between variable and fixed rates.

Over a 20- or 30-year investment horizon, this becomes not only technically messy but financially inefficient. The borrower ends up paying higher non-deductible interest purely because redraw muddied the loan’s purpose.

Offset accounts neatly sidestep all of this.

The Bottom Line: When Investment Plans Are Possible, Offset Is the Safer Tool

Offset and redraw both reduce interest, but they are not financial twins. Redraw physically alters the loan; offset sits alongside it. Redraw creates tax complications if the home becomes an investment; offset preserves the original loan’s full deductibility.

For borrowers who know they will never turn their home into an investment, redraw is often perfectly fine. For everyone else – including those who simply want to keep their options open – an offset account is the cleaner, safer, future-proof choice.