Withdraw redraw and put into offset?

Question

We are about to turn our unit, that we have lived in for 5 years, into an investment property and we are going to rent a property to live in ourselves. We have about $20 000 in redraw on our loan and want to eventually access that for a deposit on a house(for private use) in the future.

Should we withdraw the redraw amount now and put in an offset account against our loan in order to be able to access those redraw funds without affecting the tax deductability of the interest on the loan once it becomes an investment property?

Answer

Interest on a loan is only tax deductible where the funds borrowed were used in relation to an income producing asset. If you redraw the $20,000 to put a deposit on your new home or put into an offset account where the funds will be drawn on for private purposes then the interest paid on that portion of the loan will not be tax deductible when you rent the house out because the money was not used in relation to it.
Offset accounts are better than redraws for this reason. You can put extra funds in the offset account which will have the same reducing affect on interest but because it is a seperate account you can draw it out again without changing the nature of the original loan.
I recommend that you link an offset account to this loan stop making repayments on the loan put the repayments into the offset account instead, letting the extra $20,000 you have paid off the loan meet the repayments.