If you own a home in Melbourne and you're thinking about buying an investment property – or you already have one – the way you structure your loans matters far more than most people realise. One decision in particular can cost you thousands of dollars in lost tax deductions: whether to use a redraw facility or an offset account.
Used correctly, an offset account can reduce interest, improve cash flow and support future investment decisions. Used incorrectly, it can limit tax effectiveness or create unnecessary complexity.
Disclaimer: This article is general information only and does not constitute financial or tax advice. Before making any decisions about tax deductibility or property investment, we recommend speaking with a qualified accountant or financial adviser.
How does an offset account work?
An offset account is a transaction account linked to your mortgage. The balance in that account is offset daily against your loan balance, which reduces the interest you're charged.
Say, for example, you have a $500,000 mortgage and $50,000 sitting in your offset account, you will only pay interest on $450,000. Over the life of a loan, that adds up significantly.
Recent NAB data showed that on a $500,000 loan at 5.42% over 30 years, keeping money in an offset account could cut around $74,000 off the total interest paid.
You still have full access to the $50,000 at any time. You can spend it, transfer it, or top it up. It functions just like an everyday bank account – it simply reduces the interest you're accruing in the meantime.
Offset account vs redraw facility
Both offset accounts and redraw facilities reduce interest, but they are not the same. A redraw facility lets you make extra repayments on your loan and then pull that money back out later if you need it. On the surface, it sounds similar to an offset account – in both cases, you're parking cash somewhere that reduces your interest. The mechanics, though, are quite different.
With an offset account, the money never touches the loan. It sits alongside it, reducing the interest you're charged without actually paying down the principal. With a redraw facility, those extra repayments become part of the loan itself. When you take the money back out, you're technically borrowing again.
Why offset accounts matter for investment planning
For owner-occupiers, a redraw facility and an offset account are broadly similar in practical terms. For property investors, there are important tax differences.
Interest on an investment loan is generally tax-deductible. Interest on your home loan is not. This creates an opportunity for investors to structure your finances in a way that prioritises non-deductible debt.
In an offset account, because the funds haven't been used to pay down the loan itself, they don't affect the tax deductibility of the interest.
Redraw is another story. If you make extra repayments into your loan and then redraw those funds later for personal use, that portion of the loan can lose its tax-deductible status.
In simple terms:
- You want to pay down your home loan faster
- You want to preserve or maximise deductible investment debt
An offset account helps achieve this by keeping your cash alongside your home loan rather than reducing the loan balance directly.
Structuring your loan for future investment
If you are planning to invest, your loan structure should be set up from the start to support that goal. Many investors are carrying two types of debt at the same time: a home loan (where interest is not deductible) and an investment loan (where interest generally is).
It is generally recommended that you keep those loans completely separate, not consolidate them into a single facility, and never use one account for both purposes. Mixed-purpose loans, where deductible and non-deductible components sit together, can be difficult to manage correctly and easy to get wrong come tax time.
One way to maximise your tax benefits is to keep your surplus cash working against your home loan rather than your investment loan. This means reducing non-deductible debt first through an offset account on your home loan.
How offset accounts support cash flow
Cash flow can be a challenge for property investors. Unlike making extra repayments directly onto a loan, funds in an offset account remain liquid. If a large expense comes up – a school fee instalment, a property repair, a gap between tenants – you can access the money immediately without applying to redraw or restructuring anything.
Your interest reduction continues right up until the moment you need the cash, and resumes once you put it back.
The value of maintaining that buffer became clear during the rate-hiking cycle of 2022–2024. In its March 2026 financial stability review, the Reserve Bank of Australia showed that even among borrowers who experienced a cash flow shortfall at the peak, the majority had six or more months of repayments held in offset and redraw accounts – enough to weather the pressure without falling into arrears. By late 2025, that shortfall had fallen back to pre-pandemic levels.
For busy professionals managing an investment property alongside a demanding household, keeping a meaningful buffer in your offset account means you're reducing interest costs in the good months without leaving yourself exposed in the leaner ones.
When an offset account may not be the right choice
However, an offset account is not automatically the right tool for every investor. The right answer depends on your specific situation.
If your offset balance is consistently low, the interest savings may not justify any additional fees the account attracts. NAB’s data found that around half of offset account holders have up to $20,000 set aside – and at that level, fees can start to eat into the benefit. Some lenders charge higher rates or monthly fees on loans with offset facilities, so it's worth doing the numbers on whether the account is genuinely saving you money or simply adding cost.
Interest-only investment loans can also change the overall costs. Depending on how your loan is structured, the tax and cash flow benefits of an offset account may need to be weighed against whether a different loan product suits your circumstances better.
If you're not disciplined about keeping personal and investment funds separate, an offset account linked to a home loan can create exactly the kind of complexity it's meant to avoid. The account works best when it's used consistently and purposefully – not as a general-purpose transaction account where money flows in and out for unrelated reasons.
Getting the structure right
Offset accounts are not complicated in principle, but the way they interact with investment loans, tax deductibility and your broader financial structure is. The consequences of getting it wrong can follow you for the life of the loan.
A good mortgage brokerage like AXTON Finance doesn't just find you a competitive rate. We’ll help you set up your loans in a way that protects your tax position, supports your cash flow and keeps your options open as your portfolio grows. For busy professionals managing complex finances, that kind of advice is what separates a well-structured investment from one that quietly costs you money year after year.
If you're looking to buy an investment property in Melbourne, or you want to review how your existing loans are set up, speak to the team at AXTON Finance. Call 03 9939 7576, email getabetterrate@axtonfinance.com.au or get in touch today.