Redraw vs Offset: Which Is Better for Reducing Interest?

Looking for a dream investment home and confused about how to structure your home or investment loan? You are not alone. 

Few decisions matter when choosing between a redraw facility and an offset account when structuring a home loan. 

Both can reduce the interest you pay. Both look similar on the surface. But when it comes to flexibility, tax efficiency, and long-term strategy, the difference between redraw vs. offset can have a major financial impact.

For investors in particular, choosing the wrong option can quietly cost tens of thousands of dollars over time.

Let’s break it down simply.

Key Takeaways

• Both redraw and offset reduce interest by lowering the balance used to calculate interest.
  
• An offset account offers greater flexibility and protects future tax deductions.
  
• A redraw facility can create serious tax problems if used incorrectly.
  
• For most investors, offset account vs redraw is not a price decision: it is a strategy decision.
  
• If you plan to build wealth using property investment strategies, offsets usually win.
  

What Is an Offset Account? (The “Flexibility” King)

Before comparing, it’s important to know the answer to: What is an offset account?

An offset account is a transaction or savings account linked directly to your home loan. The balance in this account “offsets” your loan balance when the bank calculates interest.

How It Works: Your Money Stays in Your Pocket

The concept is simple.

Think of an offset as a normal bank account that is “married” to your loan.

• Loan balance: $500,000
  
• Money in offset: $50,000
  

The bank only charges interest on $450,000.

So, effectively, you will be earning a risk-free return equal to your loan interest rate, without actually locking your money away. Importantly, when you link an account as offset to a loan, you will no longer earn interest on the balance of the offset account. 

This is exactly what is an offset account and how it works in practice.

Key Benefit: Full Access to Your Money

Unlike redraw, your offset account behaves just like a normal bank account.

• Debit card access
  
• ATM withdrawals
  
• Transfers anytime
  
• No approval required
  

It’s your money. You control it completely.

Why Investors Love Offset Accounts

Offset accounts are extremely popular with investors. And for a good reason.

Tax Protection: Preserving Deductibility

The biggest advantage is tax safety.

When you take money out of an offset account, you are not changing your loan balance or loan purpose. You are simply spending your own cash.

This means:

• Your loan remains fully investment-purpose.
  
• Your interest deductions remain intact.
  
• No contamination risk.
  

For anyone planning multiple purchases, renovations, or future upgrades, this is critical.

That is why experienced investors almost always choose offset when structuring long-term loans through a Residential Buyers Agency.

What Is a Redraw Facility? (The “Debt Destroyer”)

Now let’s move on to the next question: what is redraw?

A redraw facility allows you to make extra repayments directly into your loan. Those extra repayments reduce your loan balance. Later, you can “redraw” that money if the lender allows it.

How It Works: Paying the Bank Directly

The concept here is different.

You’re not holding your money in an account. You are paying it into the loan.

Example:

• Loan balance: $500,000
  
• You repay extra: $50,000
  

Now your loan balance is $450,000, and interest is charged on that lower amount.

The maths is the same as offset, but the ownership of the money is different.

Key Benefit: Forced Discipline

Redraw works well for borrowers who want:

• Simplicity
  
• Fewer accounts
  
• Forced saving behaviour
  
• No temptation to spend
  

For pure owner-occupiers who will never invest, redraw can be perfectly fine.

The “Tax Trap” Warning

This is where redraw becomes dangerous for investors.

The Catch: Loan Contamination

Let’s say you have an investment loan and you have paid $50,000 extra into redraw.

Later, you redraw that $50,000 to fund a holiday.

From the Australian Taxation Office (ATO)’s perspective:

• That $50,000 is now personal debt.
  
• Interest on that portion is no longer deductible.
  
• Your loan is now mixed-purpose.
  

This is known as “loan contamination”.

Once polluted, it becomes extremely difficult, sometimes impossible, to clean up the mess properly.

This is exactly how many investors accidentally destroy the tax efficiency of otherwise strong property investment strategies.

It is also why advisers often warn against redraw when investors start chasing positive cash flow without understanding long-term tax impacts.

Comparison: Redraw vs. Offset at a Glance

Quick-Reference Table

This is why offset account vs redraw is not just a technical comparison:  it is a structural decision.

The Decision Tree: Which One Should You Pick?

Let’s make this practical.

Pick an Offset Account If…

An offset account is usually the better option if:

• You plan to turn your home into an investment property later.
  
• You expect to buy more properties.
  
• You want to preserve future tax deductions.
  
• You may use savings for deposits, renovations, or upgrades.
  
• You value flexibility and control.
  

This is the default recommendation used by most professional advisers and Residential Buyers Agency teams when building scalable portfolios.

It protects you now and in the future.

Pick a Redraw Facility If…

Redraw can make sense if:

• You will always live in the property.
  
• You have no intention of investing later.
  
• You want forced savings discipline.
  
• You don’t need frequent access to funds.
  
• Your lender offers limited offset options.
  

For long-term owner-occupiers with simple finances, redraw can be effective.

But the moment investing enters the picture is when redraw doesn’t sound safer anymore.

Conclusion

The question of Redraw vs Offset is not about which saves more interest; they both technically do.

It is about:

• Flexibility
  
• Tax safety
  
• Future planning
  
• Portfolio scalability
  

If you are serious about wealth creation, offsets are almost always the superior structure.

Redraw may look cheaper or simpler today, but for investors, it can quietly destroy future deductions and complicate portfolio growth.

In short:

• Offsets protect strategy.
  
• Redraw restricts flexibility.
  

Final Thoughts

Choosing the right loan structure early is one of the highest-impact financial decisions you will make.

Before your next purchase or before converting your home into an investment, review your loan setup carefully.

Next Step

Book a call with the InvestorKit team to review your loan structure before your next purchase. Getting this right early can save you hundreds of thousands over your investing lifetime.

References:

[1] – Canstar.com.au – Offset Account vs Redraw Account

[2] – NAB.com.au – Redraw vs Offset

[3] – CommBank.com.au – Offset Account vs Redraw Facility