Offset accounts vs redraw. The difference that matters when you sell or convert to investment.

Offset accounts and redraw facilities both achieve the same headline outcome: cash sitting against your mortgage reduces the interest you pay. They differ in how they preserve your principal balance, and that difference becomes important when you sell, refinance, or convert a PPOR to an investment property.

Most borrowers use one or the other without understanding the structural difference. The choice matters more than the headline interest saving suggests.

What offset accounts are

An offset account is a transaction account linked to your mortgage. The balance in the offset account is "offset" against the mortgage balance for the purpose of calculating interest.

Example:

• Mortgage balance: $600,000
• Offset account balance: $50,000
• Interest is calculated on: $550,000

You retain full access to the offset account balance. You can deposit, withdraw, transact normally. The offset balance is not part of the mortgage; it sits in a separate account, accessible like any savings account.

If you withdraw the full $50,000, interest is calculated on $600,000 (no offset). If you deposit, interest reduces accordingly. The offset works dynamically every day.

What redraw facilities are

A redraw facility is a feature of the mortgage itself. When you make repayments above the minimum, the excess sits inside the mortgage as "available redraw." You can later withdraw some or all of it.

Example:

• Mortgage balance: $600,000
• Available redraw: $50,000 (you have paid $50k more than the minimum over several years)
• Effective mortgage balance: $550,000 ($600k less $50k redraw available)
• Interest is calculated on: $550,000

If you withdraw the redraw, the mortgage balance rises back to $600,000 and interest is recalculated.

The key difference: the redraw amount is INSIDE the mortgage. The offset amount is OUTSIDE the mortgage.

Why the difference matters

Three specific scenarios where the structural difference produces materially different outcomes.

Scenario 1: converting PPOR to investment property

You bought a property as your PPOR, lived in it, paid down the mortgage faster than required. Now you move out and rent the property to tenants. The property is now an investment property.

The deductibility of interest on the loan depends on the purpose for which the funds were borrowed.

If you used an offset account:

• The mortgage balance has stayed at $600,000 (or whatever level you established)
• The offset account holds your savings, accessible for any purpose
• Interest deduction: the full mortgage interest is deductible against rental income (because the original purpose was to acquire the property, which is now income-producing)

If you used redraw:

• The mortgage balance has been reduced by your extra repayments
• "Available redraw" sits inside the mortgage
• If you redraw funds for any purpose (e.g. holiday, car, deposit on another property), the redrawn amount is treated as a new loan for that purpose
• Interest on the redrawn portion is deductible only if you used the redraw for an income-producing purpose

The implication: a borrower who used redraw and then withdrew funds for personal use has a "mixed-purpose" loan, where part of the interest is deductible (the original mortgage portion) and part is not (the redrawn-for-personal-use portion).

For investors, this is a significant tax disadvantage. The offset account preserves the full deductibility cleanly. The redraw can complicate it.

Scenario 2: refinancing

When you refinance the loan to a different lender or a different product, the offset account simply moves with you (or you set up a new offset on the new loan).

A redraw facility, on the other hand, often does not transfer cleanly. The new lender treats the original balance differently. You may end up with a refinance loan that is smaller (if you draw down the redraw) or a refinance loan that includes the previously redrawn capacity (if you do not).

The complications usually favour offset accounts during refinancing.

Scenario 3: selling the property

When you sell, the offset balance is yours immediately as cash (it was a transaction account).

When you sell with a redraw balance, the mortgage is paid out and the excess from the sale (which is what your redraw represented) flows to you. The outcome is similar but the process is different.

The interest saving comparison

Both offset and redraw save interest on the offset/redraw amount at the mortgage rate.

For a $50,000 balance at 6.5% mortgage rate:

• Interest saved annually: $3,250

Both offset and redraw achieve this saving. The structural differences above are what differentiate them.

Which to use

For most borrowers:

Use offset when

• You may convert the property to investment later
• You value transactional flexibility (offset account behaves like a normal bank account)
• You may refinance in the foreseeable future
• The lender does not charge a substantial premium for offset

Use redraw when

• You will hold the property as PPOR indefinitely
• You do not need transactional flexibility
• Your lender's offset feature carries a higher rate or fee than redraw
• You want to make extra repayments without the temptation of treating the offset as savings

The cost difference

Offset features sometimes carry a higher rate or annual fee than basic redraw-only loans:

• A "no offset" basic loan: 6.30% (typical)
• A "100% offset" full-feature loan: 6.50% (typical)

The 20bp premium on $600,000 is $1,200 per year. For the premium to be worth it, your average offset balance needs to be at least $19,000 (the saving from offsetting $19,000 at the higher rate equals the rate premium on the full balance).

For households with substantial savings sitting against the mortgage, offset is worth the premium. For households with minimal savings, the basic loan + redraw is more economical.

The split-purpose trap

A common borrower mistake: using redraw for both deductible and non-deductible purposes.

Example: you borrow $600,000 to buy a PPOR. You pay down to $550,000 over 5 years. You redraw $100,000 for a $100,000 share market investment, and another $20,000 for personal use.

The loan is now $670,000 with mixed purposes:

• $550,000 original PPOR purchase (non-deductible if still your PPOR)
• $100,000 redrawn for investment (deductible against investment income)
• $20,000 redrawn for personal use (non-deductible)

Tracking the interest deduction across the mixed-purpose loan requires careful allocation each year. Some borrowers solve this by splitting the loan into separate sub-accounts at refinance time, isolating each purpose.

Offset accounts avoid the mixing because the offset balance is not part of the loan.

Offset and redraw look similar in headline savings. They diverge in tax treatment, refinance handling, and the flexibility they provide. For borrowers who may convert PPOR to investment later, offset is almost always the right structural choice. Knowing the difference at loan origination saves complexity (and tax) years later.