Offset Account vs Redraw Facility: Why Property Investors Should Choose an Offset Account

If you're an investment property owner, the way you structure your loan savings can have a real impact on your tax deductions — not just your interest bill. Two of the most common tools for managing spare cash against a mortgage are offset accounts and redraw facilities. On the surface they look similar: both let you reduce the interest you pay by using your savings. But for property investors, the difference between them can mean thousands of dollars in lost deductions if you get it wrong.

How an Offset Account Works

An offset account is a separate transaction account linked to your loan. The balance in this account "offsets" your loan balance for interest calculation purposes only — it does not actually reduce the loan balance itself.

For example, if you have a $500,000 investment loan and $50,000 sitting in a linked offset account, you only pay interest on $450,000. The $50,000 remains entirely separate from the loan. You can deposit and withdraw from it freely, use it as your everyday transaction account, or draw on it for private expenses — none of this touches the loan itself.

Key point: because the offset balance is a separate asset, using the funds for private purposes has no effect on the tax deductibility of the investment loan. The loan itself is never touched.

How a Redraw Facility Works

A redraw facility allows you to make extra repayments onto your loan, reducing the loan balance, and then "redraw" those extra funds back out later if needed.

This looks similar in cash flow terms, but structurally it's very different. When you make an extra repayment, that money becomes part of the loan itself. When you redraw it, you are effectively taking out a new borrowing against that loan.

Why This Difference Matters for Tax Deductibility

This is where many property investors get caught out. Under the tax law's purpose test, the deductibility of loan interest depends on what the borrowed money was used for — not what the loan was originally used to buy.

If you redraw funds from an investment loan and use them for a private purpose (a holiday, a car, renovating your home, school fees, and so on), you have effectively created a new borrowing that is used for private purposes. The interest on that redrawn portion is no longer deductible — even though it's part of the same loan account as your investment borrowing.

Worse, this creates a blended loan — part investment purpose, part private purpose — sitting in the one account. From that point on, every repayment you make must be apportioned between the deductible and non-deductible portions, and every future redraw complicates that apportionment further. Untangling this at tax time (or under an ATO review) is genuinely painful, and mistakes are common and costly.

An offset account avoids this problem entirely because the loan balance and its purpose are never disturbed. Your $50,000 in savings can be used for absolutely anything — the loan stays 100% investment-purpose, and 100% deductible.

A Simple Way to Think About It

• Offset account: your money, sitting next to the loan, reducing interest — loan purpose stays clean no matter what you do with the offset funds.
• Redraw facility: your money becomes the loan, then a private-purpose withdrawal re-borrows it — loan purpose gets contaminated, and deductibility gets messy.

Our Recommendation

For clients holding investment properties, we generally recommend an offset account over a redraw facility wherever the loan product allows it — particularly if there's any chance you might need to access those funds for anything other than investment-related expenses down the track. The interest savings are typically comparable, but the offset structure protects your deductions and keeps your record-keeping simple.

If you already have redrawn funds mixed into an investment loan, it's worth having this reviewed — in some cases the position can still be managed or restructured, but it needs to be looked at properly rather than left to work itself out at tax time.

This article is general information only and does not take into account your personal financial situation. Please contact A1 Accounting & Tax Solution for advice tailored to your circumstances.