How a mortgage offset account works
A 100% offset account can save tens of thousands in interest. Here's exactly how it works and whether it's right for you.
The mechanics explained simply
Your home loan interest is calculated daily on the outstanding balance. An offset account is a transaction account linked to your mortgage: whatever sits in it is subtracted from your loan balance before interest is calculated.
Crucially, your money stays in the offset account. You can access it any time — it's not locked in the loan. You can use it to pay bills, make purchases, or receive your salary, and interest is calculated daily regardless of fluctuations.
The daily calculation
If your loan is $500,000 and you have $45,000 in offset, interest is charged on $455,000. At 6.0% p.a., that's $74.79/day instead of $82.19/day: a saving of $7.40 every single day, or $2,701 per year. And unlike a savings account, this saving is completely tax-free.
Interest saving compounds over the loan term: it also reduces how much of each repayment goes to interest vs principal, shortening your loan.
Offset account savings example
Simple illustration only: actual saving depends on daily balance fluctuations, compounding, and loan term. Seek advice for your specific situation.
Offset vs. redraw — which is better?
Both reduce the interest you pay. They work differently and suit different situations.
| Feature | Offset account | Redraw facility |
|---|---|---|
| Where money sits | Separate transaction account | Inside the loan (reduces balance) |
| Access to funds | Immediate, like a normal bank account | Usually available, may have delay or minimum |
| Tax for investment | No impact on deductibility | May affect deductibility if mixed with other funds |
| Fees | Some lenders charge a monthly fee | Usually free |
| Fixed rate | Usually not available | Available on most fixed rate loans |
| Best for | Owner-occupiers and investors who want access | Borrowers focused on lowest cost only |
Who gets the most from an offset account?
Salary earners with savings
If your salary gets deposited into your offset and sits there for most of the month before bills, you're saving interest every single day it's there, even if the balance moves around.
People with variable costs
An offset account is liquid. If your expenses vary month to month (trades, freelancers, commission earners), keeping a buffer in offset reduces your interest while keeping it accessible.
High marginal rate earners
A 6% interest saving is worth 6%, tax free. A savings account earning 4.5% at a 47% marginal tax rate yields 2.39% effective. Offset almost always wins for high earners.
Offset account FAQs
How does an offset account reduce my interest?
Your lender calculates interest on your outstanding loan balance daily. An offset account reduces the balance they calculate interest on: for example, a $500,000 loan with $50,000 in an offset means interest is only charged on $450,000. Over a year at 6%, that's $3,000 in interest saved (before compounding). The actual benefit depends on your loan balance, rate, and how much sits in the offset account over time.
What's the difference between an offset account and a redraw facility?
An offset account is a separate bank account (like a transaction account) where your money sits beside the loan rather than in it. Interest is calculated daily against the reduced balance. A redraw facility means extra repayments go directly into the loan: they reduce the principal, and you can redraw them later. Offset is generally better for investment properties (preserves deductibility) and for people who want their savings accessible in a normal bank account. Redraw is simpler and often fee-free.
Does an offset account work with fixed rate loans?
Rarely. Most fixed rate home loans don't come with a 100% offset account: some offer a partial offset (offsetting only a portion), but this is the exception. Variable rate loans almost universally offer full offset accounts. This is one of the reasons many borrowers either stay variable or use a split loan (fixed + variable) to access offset on the variable portion.
Is an offset account worth the higher interest rate or fees?
It depends on how much you keep in offset. If a lender charges 0.10% more for an offset product but you consistently keep $30,000+ in the account, the interest saving (e.g. $1,800/year on a $600k loan at 6%) far exceeds the rate premium. If you only keep $5,000 in offset, the saving ($300/year) may not justify extra fees. Run the numbers for your actual balance. Your broker can model this.
Can I have multiple offset accounts against one loan?
Some lenders allow up to 10 offset accounts against a single loan. This is useful for budget management: you can split money into separate accounts for bills, holidays, and emergency funds while all amounts offset the loan interest simultaneously. Not all lenders offer this, so if it's important, ask your broker to prioritise lenders with multi-offset capability.
Do I pay tax on the 'interest saved' in an offset account?
No. The interest you save via offset isn't treated as income: it's simply interest you never paid. Unlike a savings account where interest earned is taxable income, offset savings are completely tax-free. This makes offset accounts especially attractive for people on higher marginal tax rates, where a savings account earning 4.5% net of 37% tax yields just 2.84% effective, worse than offsetting a 6% loan.