Offset Accounts and Redraw: Managing Your Mortgage Cash Flow

Offset accounts and redraw facilities are two ways to accelerate mortgage repayment and improve cash flow. They sound similar but work differently and have different tax implications.

An offset account is a separate savings account linked to your mortgage. The balance in the offset account “offsets” against your mortgage balance for interest calculation purposes. If your mortgage is $400,000 and your offset account holds $50,000, you’re charged interest only on $350,000.

This is powerful. A $50,000 offset account saves roughly $3,000 per year in interest (at 6.0% rate). The money in the offset is still yours; you can withdraw it anytime. It’s liquid. However, offset accounts typically earn minimal interest (0.1–0.5%), so putting money in an offset instead of a savings account earning 4.0% interest makes sense only if the mortgage interest rate is significantly higher than the savings rate.

For investment property mortgages, offset accounts have a tax implication. The interest you save (the offset benefit) is not tax-deductible because you’re reducing a non-deductible expense. But the money in the offset is still yours and can be used for other purposes. Some investment property owners structure their offset carefully: they keep minimal offset balances to maximize interest deductibility on the mortgage.

Redraw is different. It’s a facility that lets you withdraw extra repayments you’ve made. If you’ve paid the mortgage down from $400,000 to $380,000, and you’ve made extra payments of $30,000 (reducing the balance to $350,000), you can redraw up to $30,000 of the extra you’ve paid.

Redraw is attractive because it lets you build a buffer (by overpaying the mortgage) while maintaining access to the cash if an emergency arises. However, redrawing resets your repayment plan. If you redraw $30,000 after two years of extra payments, you’ve undone two years of progress.

The interest implications are identical to offset in theory: every dollar in redraw capacity saves you daily interest at your mortgage rate. The key difference is psychology and flexibility. Offset accounts feel separate; redraw feels like it’s still “part of the mortgage”. Psychologically, some borrowers are more disciplined with redraw (less likely to touch it) than with offset (more likely to raid it).

Tax treatment of redraw is similar to offset: no direct tax benefit, but you maintain flexibility in structuring your borrowing and saving. If you have an investment property mortgage and an owner-occupier mortgage, some borrowers intentionally keep redraw on the investment property (to minimize debt for tax purposes) and maximize offset on the owner-occupier mortgage (to reduce the cost of non-deductible interest).

Lender policies vary on redraw. Some lenders allow unlimited redraw; others cap it. Some charge redraw fees ($10–$50 per redraw). Online lenders and newer lenders often have better redraw terms (instant, fee-free) than traditional banks. Confirm your lender’s policy before choosing a loan.

Split loans (e.g., 70% on a rate that allows offset, 30% on a rate that allows redraw) are common among sophisticated borrowers. The offset portion provides everyday liquidity; the redraw portion provides a longer-term buffer against interest rate spikes.

One practical trap: If you redraw funds and spend them on non-deductible items (holidays, cars), you’ve converted part of your mortgage into personal debt. The interest you pay on that redrawing portion is no longer tax-deductible (if the original mortgage was deductible). Structure your redraw carefully; only redraw if you’re redeploying the money into deductible investments or maintaining emergency reserves.

Offset accounts also attract a small annual fee (sometimes $0, sometimes $50–$100) on some lenders’ products. Budget for this. A free offset account is valuable; a $100/year offset account competing against a 4% interest savings rate is reasonable.

Disclaimer: This article provides general information only and should not be taken as financial or legal advice. Offset account terms, redraw policies, and tax implications vary by lender and loan type. Consult your tax advisor and mortgage broker before structuring your mortgage.