Offset accounts and redraw facilities are two powerful tools property investors can use to reduce interest costs and improve cash flow. While they both save money, they work differently and the right choice depends on your investment strategy, tax situation, and need for flexibility.
Key Takeaways
- Offset accounts reduce interest by linking savings directly to your loan balance, offering maximum flexibility.
- Redraw facilities reduce your loan faster but have limited access to funds and potential tax implications.
- Offset accounts are ideal for investors seeking easy access to funds and clear tax records.
- Redraw facilities suit disciplined investors who want to make extra repayments and hold funds for large one-off expenses.
- Some investors use both, combining flexibility with repayment discipline.
Understanding the Basics
What Is an Offset Account?
An offset account is a transaction account linked to your mortgage. The account balance offsets your loan balance, meaning you only pay interest on the difference.
Example: With $75,000 in an offset account against an $800,000 loan, interest is charged on $725,000.
Offset accounts operate like everyday accounts – you can deposit rental income, pay bills, and use a debit card – while still reducing your loan interest.
What Is a Redraw Facility?
A redraw facility lets you access additional repayments you’ve made above the minimum loan requirement.
Example: If you’ve paid an extra $20,000 into your loan, you can withdraw those funds later if needed.
Redraw facilities are less flexible than offsets but are excellent for reducing debt and funding large expenses like property renovations. However, if redrawn funds are used for personal purposes (e.g. upgrading your own home), that portion of interest may lose its tax deductibility.
Pros and Cons for Property Investors
Offset Accounts: Pros and Cons
Pros:
- Flexibility for everyday banking.
- Keeps rental income, savings, and tax funds separate yet working for you.
- No mixing with loan principal, simplifying tax reporting.
Cons:
- Often attract higher lender fees.
- Must maintain a healthy balance to get real benefits.
Redraw Facilities: Pros and Cons
Pros:
- Usually free with most loans.
- Encourage discipline by locking in extra repayments.
- Ideal for major one-off costs like renovations.
Cons:
- Access to redraw funds may be restricted or delayed.
- Some lenders impose withdrawal fees or limits.
- Can complicate tax deductibility if used for personal spending.
Which Option Works Best for Investors?
The choice between offset accounts and redraw facilities depends on your goals:
- Offset accounts are best if you want flexibility and easy access to funds while still saving on interest.
- Redraw facilities are best if you want a disciplined repayment strategy and don’t need constant access to funds.
A combination of both can work for some investors – using an offset account for flexibility while making extra repayments to reduce debt.
