Offset Account vs Redraw vs Paying Down a Loan: What's better for an Investment Property?
If you own an investment property and have extra cash, should you pay down the loan, put the money into redraw, or keep it in an offset account?
From a banking perspective, these options can appear similar because each may reduce the interest you pay. From a tax perspective, however, they can be very different.
For property investors who may need access to their cash again, an offset account can often provide greater flexibility than making additional loan repayments. With a redraw, withdrawing the money later is generally treated as new borrowing, and the tax treatment depends on what that money is then used for.
Here’s why the distinction matters.
What happens if I pay extra money off my investment property loan?
Making additional repayments reduces the amount you owe on your investment property.
For example, if your investment loan is $600,000 and you permanently repay $100,000, your loan balance falls to $500,000.
You'll pay less interest, but you have also permanently reduced the original investment borrowing.
If you later decide you need another $100,000, borrowing that money again does not simply restore the original investment loan for tax purposes.
Tax point: When money is borrowed or redrawn, the tax treatment of the interest generally depends on what the borrowed money is used for, not simply which property secures the loan.
This becomes particularly important with redraw facilities.
Is redraw on an investment loan tax deductible?
It depends on what you use the redrawn money for.
Suppose you have a $600,000 investment property loan and pay an additional $100,000 into it. Your balance is now $500,000.
Later, you redraw the $100,000.
If you use that money for another income-producing investment, the interest associated with that borrowing may potentially be deductible, subject to your circumstances.
But what if you use the $100,000 to:
- buy a private car;
- renovate your family home;
- pay for a holiday; or
- cover other personal expenses?
The interest relating to that redrawn amount would generally be private rather than deductible.
You may also create what's known as a mixed-purpose loan, where part of the loan relates to investment use and another part relates to private expenditure.
That can make calculating your deductible interest considerably more complicated.
Redrawing money from an investment loan for private purposes can affect the amount of interest you can claim as a tax deduction.
Offset account v’s redraw for an investment property.
An offset account works differently because the money remains your money in a separate bank account rather than being used to repay the loan.
Let's use the same example.
You have:
Investment loan: $600,000
Cash available: $100,000
Instead of paying the $100,000 into the loan, you place it into a 100% offset account linked to the mortgage.
The lender may effectively charge interest as though the loan were $500,000, while the actual loan balance remains $600,000.
Later, if you take the $100,000 out of the offset to buy a car or put towards your next home, you're withdrawing your own cash. You're not redrawing $100,000 from the investment loan.
Offset vs redraw: Money withdrawn from an offset account is your cash. Money taken from a redraw facility is generally a new borrowing. That difference can be very important for tax purposes.
What if my home later becomes an investment property?
This is one situation where planning ahead can potentially make a substantial difference.
Imagine your current home has a $400,000 mortgage and you have accumulated $200,000 in savings.
You plan to buy another home in several years and keep your current property as a rental.
If you permanently pay the $200,000 off your current mortgage, your loan falls to $200,000.
When you later purchase your new home, you can't simply borrow another $200,000 against the old property and assume the interest will be deductible because that property is now an investment.
If the new $200,000 borrowing is used to purchase your private home, the purpose of that borrowing is private.
Compare that with keeping the $200,000 in an offset account.
You could potentially reduce the interest being charged on your existing home loan while preserving the original $400,000 loan balance.
When you eventually move, you could take your $200,000 cash from the offset and use it towards your new home.
Important: The property securing a loan does not determine whether the interest is tax deductible. The purpose and use of the borrowed money are critical.
Can I claim interest just because a loan is secured against my investment property?
No. This is a common misconception.
Borrowing $100,000 against an investment property and using it to buy a private car does not generally make the interest deductible simply because the investment property is used as security.
Conversely, money borrowed for an income-producing investment may potentially generate deductible interest even when another asset is used as security.
The tracing and use of the borrowed funds matter.
Should property investors use an offset account?
There isn't one answer that suits every property investor.
An offset account may be particularly useful where you:
- expect to need the cash again;
- may buy another home in the future;
- could convert your current home into an investment property;
- want to maintain flexibility around your loan structure; or
- want to reduce interest without permanently paying down the loan.
There may also be fees, interest-rate differences and lending considerations associated with offset facilities, so the overall benefit needs to be assessed.
The important thing is to consider the tax consequences before moving the money, rather than trying to fix the loan structure afterwards.
Frequently Asked Questions
Is an offset account better than redraw for an investment property?
An offset account can provide greater flexibility because money in the account remains your cash. Money withdrawn through redraw is borrowed money, and the tax treatment of the associated interest depends on how the redrawn funds are used.
Does withdrawing money from an offset account affect tax deductibility?
Withdrawing your own money from an offset account does not itself change the purpose of the original loan. However, removing money from the offset means the lender will generally charge interest on a greater portion of the loan.
Is redraw from an investment property loan tax deductible?
Not automatically. The deductibility of interest on redrawn funds generally depends on what the money is used for. Redrawing for private expenses would generally result in the associated interest being private.
Can I redraw from my investment loan to buy a car?
You may be able to do so from a lending perspective, but if the car is for private use, the interest associated with that redraw would generally not be tax deductible.
Can I redraw from my investment property to buy another investment property?
Interest on money borrowed and used to acquire another income-producing investment may potentially be deductible. The structure and tracing of the funds are important, so professional advice should be obtained before proceeding.
What happens if I use an investment loan for both private and investment expenses?
You may create a mixed-purpose loan. The interest may then need to be apportioned between deductible and non-deductible components, potentially for many years.
Should I pay off my home loan if I might rent the property out later?
It is worth getting tax advice before making substantial additional repayments if there is a possibility the property will later become an investment. An offset account may provide greater flexibility in some circumstances.
Is interest on an investment property loan always tax deductible?
No. Deductibility depends on factors including the purpose and use of the borrowed funds. Simply securing a loan against an investment property does not automatically make the interest deductible.
Do you have questions about your investment property loans or tax? Talk to Us
At Cashflow Financial, we can review your existing loans, investment properties and future property plans and help you understand the tax implications before you restructure your debt.
Considering paying down a mortgage, using redraw, refinancing or turning your home into an investment property? Contact Cashflow Financial before you move the money. Getting the structure right from the beginning can save considerable complications later. We have offices in Wollongong and Sutherland and work with clients all across NSW. We are here to help.
This article provides general information only and does not constitute personal tax, financial or lending advice. Tax outcomes depend on individual circumstances. Seek professional advice before making financial or investment decisions.