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Mortgage Offset Account vs Redraw Facility Guide Australia (2026–27)

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Mortgage Offset Account vs Redraw Facility Guide (2026–27)

When taking out a variable-rate residential home loan in Australia, almost all major lenders (CBA, Westpac, NAB, ANZ, and non-bank lenders) offer two popular features to reduce the total interest you pay: a 100% Offset Account and a Redraw Facility.

While both features allow your extra cash to reduce the daily interest charged on your mortgage, they operate under fundamentally different banking and legal structures. Choosing the wrong option can trigger unexpected tax consequences if you ever convert your home into a rental investment property later in life.

This guide provides a side-by-side comparison of offset accounts vs redraw facilities, tax deductibility rules under ATO guidelines, and how to maximize your mortgage interest savings.

1. How a 100% Mortgage Offset Account Works

A 100% Offset Account is a standard transaction bank account (with its own BSB, account number, debit card, and online banking access) linked directly to your home loan.

The Offset Mechanism

Every dollar sitting in your offset account "offsets" the principal balance of your mortgage on a dollar-for-dollar basis when daily interest is calculated:

Interest Charged On=Loan Principal Balance−Offset Account Balance\text{Interest Charged On} = \text{Loan Principal Balance} - \text{Offset Account Balance}

Example:

  • Mortgage Balance: $600,000 at 6.0% p.a.
  • Cash in Offset Account: $50,000 (savings, salary, emergency fund).
  • Bank Charges Interest On: $600,000 - $50,000 = $550,000.
  • Annual Interest Saved: $50,000 \times 6.0% = $3,000 per year tax-free!

Because you are saving interest rather than earning taxable interest income, your effective return is completely tax-free (equivalent to earning ~8.8% p.a. pre-tax for an Australian in the 30% + 2% Medicare bracket).

2. How a Redraw Facility Works

A Redraw Facility is a feature attached directly to your mortgage account that allows you to withdraw any extra principal repayments you have made above the minimum scheduled monthly payments.

  • Extra money paid into redraw goes directly into the loan account itself, reducing the physical debt balance.
  • If you need the money later (e.g. for home renovations or an emergency), you can "redraw" those excess funds back into your everyday transaction account.

3. Side-by-Side Comparison: Offset vs. Redraw

Feature100% Mortgage Offset AccountLoan Redraw Facility
Account TypeSeparate deposit account (covered by government $250k FCS guarantee)Internal feature of the loan account itself
Access & UsabilityInstant access via Debit Card, Apple Pay, EFTPOS, BPAYRequires manual transfer back to transaction account
Lender FeesOften part of a "Package Fee" (~200 – $395/yr)Often free or low monthly fee
Interest Savings100% offset of daily interest100% reduction of loan balance interest
Lender Redraw RestrictionsFunds are yours; lender cannot block accessUnder strict terms, lenders can freeze or reduce redraw in hardship
Tax Deductibility (Future Investment)100% Preserved — withdrawing savings does not taint loan tax deductibilityContaminated Purpose — withdrawing from redraw is deemed a "new borrowing" by the ATO

4. The Critical Tax Trap: Converting Home to Investment Property

The most crucial reason Australian property owners choose an offset account is the ATO Purpose Test:

  • If you use an Offset Account: The loan balance was never paid down; money was merely deposited in a separate savings account. If you withdraw $100,000 from offset to buy your next home, your original mortgage remains at $600,000. When the first property becomes a rental, 100% of interest on the $600,000 loan is fully tax deductible under negative gearing rules.
  • If you use Redraw: Paying $100,000 into redraw physically reduces the loan to $500,000. Withdrawing that $100,000 later for personal living or a new PPR is deemed a new personal loan by the ATO. You can only claim tax deductions on the remaining $500,000 balance!

5. Calculate Your Offset & Redraw Savings

See how much interest you can save and test your mortgage numbers using our free tools:

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