Offset Account on an Investment Loan: How It Works in Australia

An offset account on an investment loan is a transaction account linked to your loan that reduces the balance you pay interest on, while keeping your savings within reach. On an investment property loan it carries an extra wrinkle that a home loan does not, because the way you hold and move money can affect the interest you may be able to claim at tax time. This guide explains how an offset account works on an investment loan, how it compares with a redraw facility, and what to weigh before you decide. It is general information only, and what suits you depends on your circumstances and each lender’s criteria.

This guidance draws on the Australian Securities and Investments Commission, known as ASIC, and its MoneySmart service, the government’s independent money guidance.

What an offset account is

An offset account is a transaction account linked to your loan, generally available with a variable rate loan. The balance you hold in it reduces the amount of your loan that is charged interest. It works like a regular everyday account, so your salary can land in it, your bills and direct debits can come out of it, and you can use a debit card against it.

Interest on most loans is calculated daily. Each day, your lender subtracts your offset account balance from your loan balance before working out the interest. MoneySmart gives a clear worked example: on a $500,000 loan with $20,000 sitting in an offset account, interest is charged on $480,000 rather than the full balance. The more you keep in the offset, and the longer you keep it there, the more interest you may save.

The offset account itself earns no interest of its own. The benefit shows up as reduced loan interest instead, which is why it sits differently from a standard savings account.

An offset can be 100 per cent, where the full balance offsets the loan, or partial, where only a portion of the balance offsets. It is worth checking which type a loan offers, because a partial offset does less work than a full one.

How an offset account works on an investment loan

The mechanics of offsetting are the same whether the loan is for your home or an investment property. The difference on an investment loan is what offsetting does to your tax position, and this is where an offset account and a redraw facility can lead to very different outcomes.

The interest you may be able to claim on an investment loan generally depends on the borrowed money being used to produce income, such as rent. An offset account is a separate transaction account linked to the loan. When you put savings into it, you are not repaying the loan or changing the loan balance itself, so the borrowed amount that produced your investment income stays intact. You reduce the interest charged today, and your savings stay available to move out again later.

A redraw facility behaves differently. With redraw, the extra repayments you make go straight onto the loan, which lowers the loan balance. If you later pull that money back out and spend it on something private, you can change the character of part of the loan, and that can reduce the portion of interest you may be able to claim. This is a common trap on investment loans, and it is the main reason many investors lean toward an offset account rather than redraw.

Because this is a tax matter and the rules can change, treat the comparison above as general information. The Australian Taxation Office, known as the ATO, is the source for tax rules, and a registered tax agent can confirm what applies to your situation before you set anything up.

Offset account versus redraw on an investment loan

It helps to see the two side by side. Both can reduce the interest you pay. They differ in how they touch the loan balance and, on an investment loan, how they sit with tax.

The short version: an offset account keeps your savings separate from the loan, so the deductible loan amount is left undisturbed, and you can move money in and out freely. A redraw facility lowers the loan balance and then lets you pull money back, which is simpler but can complicate the tax position on an investment loan if redrawn funds are used for private spending.

If you are still working out how rates and repayments fit together, our explainer on the comparison rate shows why the headline rate is not the whole story, and the piece on interest rates covers how rate movements flow through to what you repay.

What it may cost

An offset feature is not always free. Lenders may charge an annual package fee, a monthly account fee, or a higher interest rate for a loan that includes an offset account. None of that is a reason to rule it out, but it is a reason to do the sums.

An offset may not be worthwhile if the loan has higher fees to include the offset feature and the interest rate is higher than similar loans without one. The question is whether the interest you could save by holding a balance in the offset outweighs the extra cost of the feature. That depends on how much you can realistically keep in the account, the rate, and the fees, so it is worth modelling before you commit.

A simple way to start is to look at how much you could borrow and repay, then picture what holding a few thousand dollars in offset would do to the interest. Our calculator is a sensible first step before you weigh up the offset feature itself.

Who an offset account on an investment loan may suit

An offset account tends to suit investors who keep a meaningful cash balance, such as a buffer for repairs, vacancies or rate rises, and who want that money working against the loan without locking it away. It also suits investors who want to protect the deductible portion of their loan and prefer not to risk tainting it through redraw.

It may be less useful if you rarely hold a balance, since an empty offset saves nothing, or if a comparable loan without the feature carries a lower rate and fees. As with everything here, whether it fits depends on your circumstances and each lender’s criteria, and a tax professional should confirm the tax side.

If you are weighing an investment loan alongside a first home, the guide to a first home buyer investment property is a useful companion, and the explainer on first home loan repayments shows how repayments are built.

Frequently asked questions

Talk it through with the team at Finance Lab

An offset account on an investment loan is one of those features that looks simple and turns on the detail underneath it: how much you hold, the rate and fees, your loan structure, and your tax position. If you want to understand whether an offset could work for your investment loan, and how it compares with redraw for your situation, the team at Finance Lab can walk through it with you and work alongside your accountant or adviser.