They can look similar on a home-loan statement
An offset account is generally a separate transaction account linked to a home loan. Its balance reduces the amount of the loan on which interest is calculated.
A redraw facility gives access, subject to the lender's terms, to eligible extra repayments that have already been paid into the loan. The money is part of the loan account until it is redrawn.
For an owner-occupied home loan, both features can help reduce interest. But they are not legally or structurally the same thing.
Offset versus redraw
The practical differences can matter when choosing a loan structure.
| Comparison | Offset account | Redraw facility |
|---|---|---|
| Where the money sits | Separate transaction/deposit account linked to the loan | Extra repayments are paid into the loan |
| Access | Usually accessed like an ordinary transaction account | Access is subject to lender redraw rules, limits and availability |
| Effect on interest | Offset balance reduces the loan balance used for interest calculation | Extra repayments reduce the actual loan balance until redrawn |
| Loan balance | Contractual loan balance remains separate from offset cash | Loan principal has been paid down and may increase again when funds are redrawn |
| Tax considerations | Can be useful when preserving the original purpose of borrowing | The use of redrawn funds can affect interest deductibility where the property is income producing or later becomes income producing |
Why redraw can become important for an investment property
Australian tax treatment generally looks at the use of borrowed money when determining whether interest is deductible. ATO Taxation Ruling TR 2000/2 states that a redraw is a separate borrowing and that the deductibility of interest attributable to the redrawn amount depends on what the redrawn funds are used for.
That can become relevant where a former home is later rented out, or where a loan has mixed private and income-producing purposes. Using redraw for private spending can create a different tax outcome from retaining cash in an offset account while leaving the original loan balance intact.
This is a tax issue rather than a mortgage-broking recommendation, so individual circumstances should be discussed with a registered tax adviser.
Sources & references
- ATO Taxation Ruling TR 2000/2
ATO ruling on interest deductibility for line-of-credit and redraw facilities.
- Moneysmart — Mortgage offset accounts
Consumer explanation of how mortgage offset accounts work.