Offset vs Redraw and Loan Deductibility

Offset and redraw both let you reduce the interest you pay and keep access to spare funds, so in day-to-day use they feel similar. For tax, though, they can behave quite differently — and for property investors that difference is worth understanding before money starts moving between accounts.

The short version: an offset balance is your own savings sitting beside the loan, while redrawing is effectively new borrowing. Because the deductibility of loan interest generally follows the purpose the borrowed money is used for, that distinction can change the tax character of what you do. This guide explains the principles in plain English. It is general information only and uses “may”, “can” and “depends” deliberately — it is not personal tax advice, and it does not guarantee any deduction.

An offset account is a separate transaction account linked to your home or investment loan. The balance in it is offset against the loan balance when interest is calculated, so you pay less interest — but the money is still your own savings, which you can spend or move whenever you like. You have not repaid the loan; you have simply parked savings beside it.

Because the funds in an offset remain your own money, using them does not generally change the purpose of the underlying loan. That is one reason offsets are commonly discussed in the context of investment lending, where preserving the loan’s deductible character can matter. How an offset suits you depends on your circumstances — see our loan features explained page for how offset sits alongside redraw, splits and other features.

Redraw lets you pull back extra repayments you have already made into the loan. The key point is that those extra repayments were applied against the loan principal, so when you redraw them you are, in substance, borrowing again. The deductibility of interest on the redrawn amount generally depends on what the redrawn funds are then used for — broadly, whether they go to an income-producing purpose.

This is where care pays off. Redrawing from an investment loan to fund something private can change the deductible proportion of the loan. Redrawing for a further investment purpose is a different matter again. None of this is automatic, and the treatment depends on the facts and the rules for the relevant year — which is exactly why purpose and records matter.

The most common pitfall is the mixed-purpose, or “contaminated”, loan. Once a single loan has been used partly for income-producing purposes and partly for private ones — say, an investment loan that has been redrawn for a private expense — apportioning the deductible interest becomes complicated, and the records have to support whatever split is claimed.

It is generally far easier to keep purposes separate from the outset than to untangle a mixed loan later. That can mean using separate loan splits for separate purposes, being deliberate about whether to use offset or redraw, and keeping clear records of what each borrowing was for. The tax side and the loan-structure side interact here, which is the theme of our tax-aware mortgage strategy page.

Because some of these steps are hard to reverse cleanly, the sensible order is to map the purpose and the tax consequences before moving funds between offset, redraw and loan accounts — particularly across owner-occupier and investment loans. Keep records of what is borrowed and why, and treat loan structure and deductibility as one connected question rather than two separate ones.

We can look at both the lending structure and the tax position together — see our investment property loans and rental property tax pages, or get in touch for a coordinated conversation. Anything you do should be confirmed with advice for your specific circumstances.

This guide is general information only and does not take into account your objectives, financial situation or needs. It is not personal tax or credit advice and does not guarantee deductibility of any interest. The deductibility of loan interest depends on the use of the borrowed funds, your records and the law for the relevant income year. Seek advice before restructuring a loan or moving funds between accounts.