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Redraw vs offset: the practical difference

Offset and redraw look similar - both reduce the interest you pay - but the legal and tax differences matter in three situations. Here’s the short version, followed by the three cases where the difference bites.

Mechanically

Offset is a transaction account in your name. The balance offsets the loan for interest calculation but the money is yours - you can spend it, transfer it, and the ATO treats it exactly like any other savings account.

Redraw is money you’ve already repaid to the lender, available to draw back. The loan balance actually went down, then you can request some of it back. The ATO treats a redraw as new borrowing.

Case 1 - converting your home to an investment

This is the big one. Say you owe $500,000 on your home, pay extra $200,000 over five years, then decide to keep the house as an investment and buy a new home.

  • If the $200,000 is in offset: withdraw it, use it as a deposit on the new home, and you still owe $500,000 on the old home. That $500,000 is now investment debt - fully tax-deductible.
  • If the $200,000 is in redraw: you drew it out to fund a new (personal) home, so that $200,000 is personal-use borrowing - not deductible. You’ve permanently lost the deductibility on $200,000 of debt.

The difference on a 6% loan over 25 years is roughly $90,000 of tax deductions you’ve just forfeited.

Case 2 - lender restrictions

During COVID and again in late 2024, several lenders restricted redraw. Some required 48 hours’ notice, some capped per-transaction amounts, some temporarily suspended it entirely. Offset funds are never restricted - they’re in a transaction account you control.

Case 3 - bankruptcy and asset protection

If you go into personal bankruptcy, money in offset is your money - it forms part of the bankrupt estate. Money in redraw is the lender’s - it’s debt you’ve paid down. Offset is worse for asset protection; redraw is worse for tax flexibility. Which matters more is case-by-case.

Which should most people use

For borrowers who expect to live in the current home indefinitely with no conversion to investment: redraw is fine and the lender usually offers a slightly lower rate on redraw-only (no-offset) products.

For everyone else - especially anyone who might someday convert their home to an investment, or who wants genuine liquidity - pay the package fee and use offset.

The hybrid approach

Some lenders allow split loans with offset on one part and redraw-only on the other. For a first-home buyer with no clear long-term plan, a 70/30 split (70% offset, 30% redraw) balances flexibility against fee cost.