Ask a property investor where their spare cash is sitting and most will say "in the loan." Half the time they mean offset. Half the time they mean redraw. They think it's the same answer.
It isn't. And at 6% interest rates, the difference is worth more than it's been in over a decade. The after-tax return on cash in a well-structured offset account has more than doubled since the rate cycle started. This holds even after accounting for the lost interest deduction on investment debt. If you haven't revisited this question since you set up your loans, you've likely left money on the table.
This edition covers three principles that govern the offset vs redraw decision, and a four-step process for applying them across a multi-property portfolio. The headline decision is straightforward. The details are where most investors get it wrong, particularly the tax treatment on investment debt.
Every dollar in an offset account reduces the interest charged on your loan. How much that's worth after tax depends on one thing: whether that interest was deductible in the first place.
For non-deductible debt (the family home), an offset saving is a full after-tax return at the loan rate. At 6.2%, $50,000 in offset saves $3,100 per year. Guaranteed, accessible, no tax event.
For investment debt, where interest is generally deductible, the calculation runs differently. The interest you don't pay is also the deduction you don't claim. At a 47% marginal tax rate, the net after-tax benefit on $50,000 at 6.2%:
| Interest saved ($50,000 × 6.2%) | $3,100 |
| Lost deduction (47%) | −$1,457 |
| Net after-tax benefit | $1,643 |
That number has still more than doubled since 2021. The rate environment has changed what idle cash is worth, for PPOR and investment borrowers alike.
| Rate era | Rate | Gross saving ($50k) | Net after-tax (investor, 47%) |
|---|---|---|---|
| 2021 | 2.5% | $1,250 | ~$663 |
| Today | 6.2% | $3,100 | ~$1,643 |
For PPOR borrowers, the full $3,100 applies: no deduction to lose. For investors, it's the net figure that matters. Any comparison with alternatives should be made on the same after-tax basis. Gross-to-gross comparisons mislead.
Key insight: at today's rates, offset earns a competitive after-tax return even on investment debt. Measure it correctly. The gross saving is not the after-tax saving.
Offset and redraw are not the same product. This is the mistake most investors make, and it compounds.
Redraw is money you have paid down ahead of schedule on your loan. It sits inside the loan balance. The lender holds it. And in Australia, lenders can restrict or reduce access to it. This happened in 2020, most notably with ME Bank, when available redraw balances were reduced for thousands of borrowers without warning, prompting regulators to seek explanations. The point stands: redraw is inside the lender's loan system, and access is at their discretion.
Offset is a separate transaction account. Lenders cannot unilaterally reduce your offset balance the way they can restrict redraw. It is not a technical distinction. It is the difference between your money and the bank's money.
There is a second issue specific to investors: tax deductibility.
If you hold an investment loan and redraw from it for a non-investment purpose, or mix redrawn funds with personal money before applying them to a new investment, you may create a tracing problem. The ATO's position is that the purpose of the borrowed funds determines whether interest is deductible. A mixed-purpose redraw can contaminate deductibility on that portion of the loan. It is expensive and difficult to unwind. Offset never touches the loan principal, so it never creates this problem.
| Redraw | Offset | |
|---|---|---|
| Location | Inside the loan balance | Separate transaction account |
| Lender control | Can restrict or reduce access | Cannot unilaterally reduce balance |
| Deductibility | Mixed-purpose draws create tracing risk | No impact on loan principal or deductibility |
If any investment loans have cash in redraw with no offset facility in place, that is a broker conversation worth having.
Key insight: offset gives you two things redraw cannot: substantially better protection of access, and a clean deductibility position.
If you hold multiple loans at different rates, putting your offset on the highest-rate variable loan saves the most interest.
On a $50,000 offset at 47% marginal rate:
| Loan rate | Net after-tax benefit |
|---|---|
| 6.3% investment loan | ~$1,670/year |
| 5.8% investment loan | ~$1,537/year |
| Difference | ~$133/year |
Modest in isolation. Across a portfolio over a decade, less so.
One exception applies: if you need reliable access to that cash for a specific purpose (a deposit, emergency, renovation draw), accessibility matters as much as the rate differential. Don't optimise for $133 at the cost of operational friction when the money needs to move quickly.
Key insight: stack your offset on the highest-rate variable loan, unless access requirements outweigh the saving.
Step 1: Confirm your offset facilities. Not all loan products include offset. Some lenders charge a monthly fee for it. Run through every loan in the portfolio and confirm which have an offset facility and whether it is being used.
Step 2: Calculate your actual net benefit. For investment debt: (interest saved) × (1 − marginal tax rate) gives the approximate after-tax benefit from a full offset on that loan. For PPOR debt, no adjustment is needed. Use this to identify where the highest-value placement sits across your portfolio.
Step 3: Stack your accessible cash. Idle capital (deposit seeds, emergency buffers, renovation funds, tax provisions) should sit in the offset on your highest-rate variable loan. Cash spread across transaction accounts or savings accounts earning 3% has a real cost.
Step 4: Review when rates move. The benefit increases automatically when rates rise and narrows when they fall. Revisit annually, or after any movement of 0.5% or more. Rates used in the examples throughout this edition are illustrative. Product terms change frequently.
Sam comes out of Issue #9 in a position he didn't quite expect: well-placed, and waiting.
Three properties. $1,538,000 in debt. DTI at 5.80x, sitting just below the 6x mark where major banks begin to tighten and APRA's high-DTI lending limits start to apply. And $52,000 sitting in his transaction account: equity released from the P3 refinance, earmarked as the deposit seed for a fourth acquisition. The plan is 12–18 months of principal reductions and income growth to clear the threshold. P4 is coming. It's just not coming yet.
The question is where the $52,000 sits while it waits.
His broker walks through three options:
Option A: Term deposit at 5.2%, 12 months. $52,000 at 5.2% = $2,704 gross. Tax at 47%: $1,271. After-tax return: $1,433. Locked for the term.
Option B: High-interest savings account at 5.0%. $52,000 at 5.0% = $2,600 gross. Tax: $1,222. After-tax: $1,378. Accessible, but taxable income each year.
Option C: Offset on P3 at 6.2% IO. $52,000 × 6.2% = $3,224 less interest charged. P3 is an investment loan. The interest is deductible, so Sam also gives up the tax deduction on that $3,224. At 47%, the lost deduction is worth $1,515. Net after-tax benefit: $1,709. And the money stays accessible from day one.
| Option | Gross benefit | Tax impact | After-tax benefit |
|---|---|---|---|
| Term deposit 5.2% | $2,704 | −$1,271 | $1,433 |
| Savings account 5.0% | $2,600 | −$1,222 | $1,378 |
| Offset on P3 (6.2% investment loan) | $3,224 saved | −$1,515 lost deduction | $1,709 |
Sam moves the $52,000 into his P3 offset account.
He also checks the other loans. P1 (Brisbane) has an offset facility, currently empty. No spare cash to fill it now, but it's noted as the destination for any cashflow surplus. P2 (regional duplex) is IO with no offset facility. A broker conversation for the next review.
Over 12 months: $3,224 less in interest charges. After the lost deduction, the net benefit is approximately $1,709. Still ahead of the term deposit and savings account, with the deposit sitting accessible and ready. When DTI clears and the P4 window opens, the $52,000 is there from day one.
The offset decision looks like an administrative detail. It isn't. It's a capital allocation choice, and in a high-rate environment, one of the cleaner ways to improve portfolio returns without adding risk or complexity. What I find is that most investors set up their loans at purchase and never revisit where their cash sits. The maths has moved substantially since the rate cycle started. On investment debt, the after-tax benefit from a well-placed offset is not quite the headline rate, but it is still competitive with anything else you can do with accessible money. If you haven't run the numbers on your own position recently, that's this week's work.
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See you next week. — Alex
Next week: The Sequence Problem. Why the order you buy matters more than what you buy.
This article is for educational purposes only. It does not constitute financial, legal, or tax advice. Everyone's circumstances are different. Please seek professional advice before acting on any of the strategies outlined above.