Redraw vs Offset: How Tax Impacts Your Home Loan

When comparing redraw vs offset accounts, most borrowers focus on interest savings. But the tax impact of redraw and offset accounts can be far more important, especially if your home later becomes an investment property.

Understanding this difference early can save tens of thousands of dollars in lost tax deductions.

Redraw vs Offset accounts: understanding the tax impact can save homeowners thousands.

What is a redraw facility?

A redraw facility allows you to withdraw extra repayments you’ve made on your home loan.

From a tax perspective, the purpose of the redrawn funds matters. If you redraw money for personal use (cars, holidays, weddings), that portion of the loan becomes non-deductible, even if the property later becomes a rental.

This creates what accountants call a mixed-purpose loan, which must be apportioned every year.

What is an offset account?

An offset account is a separate savings account linked to your loan. The money in the offset reduces the interest charged, but does not change the loan balance.

From a tax point of view:

• The loan purpose remains intact

• No mixed-purpose loan is created

• Future mortgage interest tax deductions are preserved

This makes offset accounts the preferred structure for borrowers who may one day invest.

Redraw vs offset: tax impact example

Let’s say you:

• Borrow $630,000

• Save $60,000 over time

With redraw (never redrawn):

• Loan reduces to $570,000

• Interest is deductible only on $570,000

With offset:

• Loan remains $630,000

• Offset holds $60,000

• Interest charged on $570,000 while living there

• If it becomes an investment, interest on $630,000 is deductible

Couples vs single buyers: why offset matters more

The redraw vs offset decision is riskier for couples.

Common issues with redraw:

• One partner redraws without understanding tax impact

• Funds used for private purposes

• Loan becomes contaminated unintentionally

For couples, especially with joint loans or unequal ownership shares, redraw can:

• Increase accounting complexity

• Cause disputes

• Permanently reduce deductible debt

Offset accounts eliminate these risks by keeping savings and spending separate from the loan itself.

When does redraw make sense?

A redraw facility may be acceptable if:

• The property will never become an investment

• You are highly disciplined

• You understand the long-term tax consequences

However, for most Australian borrowers, especially first home buyers and couples, an offset account offers superior flexibility and tax efficiency.

Final takeaway:

Redraw is a discipline-based strategy. Offset is a structural solution. If there is any chance your home could become an investment, an offset account is almost always the smarter choice.

Disclaimer:

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