Offset Account

An offset account is a transaction account linked to your home loan whose balance is subtracted from the loan principal before interest is calculated. Every dollar parked there saves untaxed interest at your mortgage rate, which beats a savings account more often than people realise.

Banking, Debt & Day-to-DayLast reviewed 2026-09-26

What it is

An offset account is an ordinary deposit account linked to your home loan. For interest purposes, the bank pretends the offset balance does not exist as savings and instead nets it against your loan principal each day. A $500,000 loan with $30,000 in a 100% offset is charged interest as if the loan were $470,000. Your repayment stays the same, so more of each payment hits principal and the loan ends sooner. Your offset money remains fully yours, withdrawable on any Tuesday, unlike money poured into the loan itself.

The standard to demand is a 100% offset, because some products only offset part of the balance or pay a reduced effective offset rate, which quietly halves the benefit. The interest saved is not income, so unlike high-interest savings account earnings it is never taxed at your marginal rate or touched by the Medicare levy. That tax asymmetry is the entire reason an offset usually beats a HISA. Lenders typically charge a package fee for the privilege, so the maths only wins if your average balance is big enough to cover it.

Key takeaways

Offset balance is netted against your loan principal daily, cutting interest while the money stays fully accessible to you.
$30,000 in a full offset on a 6% loan saves roughly $1,800 a year, and that saving is untaxed unlike savings interest.
Offset beats a HISA whenever your mortgage rate exceeds the HISA rate multiplied by (1 minus your marginal tax rate).
A redraw facility is not an offset: redraw money belongs to the bank until it agrees to release it, and it can be frozen.
Routing your fortnightly pay through the offset and paying expenses from it maximises the daily balance and the interest saving.

How it works

Interest on Australian home loans is calculated on the daily balance and charged monthly. With a 100% offset, the bank adds up your offset balance each day and subtracts it from the loan balance before applying the daily rate, which is your annual rate divided by 365. On a $500,000 loan at 6% with $30,000 parked in offset, you pay interest on $470,000: roughly $77.26 a day instead of $82.19, saving about $4.93 daily or $1,800 a year. Because your scheduled repayment is unchanged, that saved interest silently converts into extra principal, which shortens the loan term, often by years.

The tax treatment is the second engine. HISA interest is assessable income at your marginal rate plus the 2% Medicare levy, so a 5% HISA at a 30% bracket nets about 3.4%. A 6% mortgage offset delivers the full 6%, tax-free, because saved interest is not income. Compare the two with your own figures in the mortgage affordability calculator and the take home pay calculator before choosing where cash lives. That asymmetry is why every dull financial plan quietly favours offsets over savings accounts for anyone carrying a mortgage.

Why it matters

The offset is the one place where laziness and optimisation coincide. Money you were going to keep anyway, your emergency fund, your bill float, your savings, does paid work while it sits there, at the highest risk-free rate available to a household: your own mortgage rate. On a 6% loan, every offset dollar earns the equivalent of roughly 9.4% from a taxable HISA at a 30% marginal rate. No savings product on the market is offering 9.4% with full liquidity and zero risk, because that product cannot exist.

A colleague named Brent (yes, that Brent) kept $40,000 in a 4.8% HISA for three years because he liked seeing the interest credits, while his mortgage charged 6.2%. His proud interest haul was about $1,920 a year before tax, $1,305 after it, while that same $40,000 in his offset would have saved $2,480 annually, untaxed. Over three years Brent gifted the bank roughly $3,500 for the pleasure of watching a number go up in the wrong app.

The practical playbook is boring and that is the point. Run your pay into the offset each fortnight, pay every expense from it, and keep as little as possible in a worthless 0.01% transaction account. The highest-leverage version: check your loan offers a genuine 100% offset and move the float today. Run your own mortgage-versus-savings split through the mortgage affordability calculator, and keep the buffer honest with the emergency fund calculator.

Real-world examples

1. $30,000 parked in a 100% offset against a $500,000 loan at 6%

Without offset, daily interest is $500,000 times 6% divided by 365, about $82.19. With $30,000 offset, it is $470,000 times 6% divided by 365, about $77.26, a saving of roughly $4.93 per day or $1,800 per year, untaxed. Kept up over 25 years with the base rate staying put, that saves over $45,000 of interest and cuts roughly three years off the loan. A HISA earning the same $1,800 would be taxed at up to 32% plus Medicare, netting about $1,224.

2. Outfit your pay cycle: $4,300 fortnightly salary through the offset

A worker on $112,000 receives about $4,300 net each fortnight into the offset of a $620,000 loan at 6%. If expenses of roughly $75 a day dribble out, the average extra balance sits near $2,000 for the cycle. That alone shaves about $120 a year off interest, but combined with a $25,000 emergency fund the total offset average near $27,000 saves roughly $1,620 a year, tax-free, versus about $1,300 in a 5% HISA before tax.

3. Offset versus redraw on a $450,000 loan when plans change

Two owners each park $20,000: one in a 100% offset, one in the loan with redraw. Both save about $1,200 a year at 6%. Then one lender quietly converts redraw loans to principal-and-interest-only access during a hardship review, and the redraw owner cannot access their $20,000 without an application, while the offset owner transfers theirs in seconds. Same saving mechanics, totally different control, and the bank's terms and conditions had announced the risk all along.

Common mistakes

Mistake: Paying a $395 annual package fee for an offset with a tiny average balance.

Why it bites you: At 6% you need roughly $6,600 parked year-round just to break even on the fee. Keep $3,000 in offset and you lose about $215 a year versus a fee-free loan with redraw.

Mistake: Assuming every offset product is a 100% offset.

Why it bites you: Some loans offset only a portion or at a reduced rate. On $30,000, a 40% partial offset wastes roughly $1,080 of the $1,800 annual saving you thought you were getting at 6%.

Mistake: Using redraw as if it were an offset account.

Why it bites you: Redraw money is the bank's until it approves release, and lenders have frozen or restricted redraw before, including for customers ahead on repayments. An offset keeps your $20,000 legally yours and instantly accessible.

Mistake: Chasing a HISA headline rate while carrying a mortgage.

Why it bites you: A 5% HISA at the 30% bracket plus Medicare nets about 3.4% after tax, versus a full 6% in the offset. Holding $40,000 in the HISA instead costs roughly $1,040 a year in the wrong account.

Ivy's take

I ran the numbers through eleven offset-versus-HISA scenarios across brackets and rates so you don't have to, and the offset won ten of them. The only winner for the HISA was the imaginary borrower whose mortgage is nearly paid off, and even then the offset is free parking for the float. This is not a close race dressed up as one; the tax system has picked a side.

The redraw-versus-offset confusion is where people actually get hurt, so read your loan contract rather than the brochure. Brent kept his savings where he could admire them and paid his bank a four-figure sum for the privilege. Admire your loan balance shrinking instead; it is far better viewing.

Related jargon, defined

100% offset: An account whose full balance is netted against the loan principal daily for interest calculation.
Partial offset: An offset product that credits only a portion of the balance or a reduced rate against the loan.
Redraw facility: Access to extra repayments you have made on the loan itself, controlled by the lender and potentially restricted.
Daily interest calculation: Interest charged each day on that day's net loan balance, which is why every day in offset counts.
Package fee: An annual fee, often around $395, charged for offset and package features, which small balances may never recoup.
Emergency fund: Three to six months of expenses kept liquid; the ideal first tenant of an offset account.

Frequently asked questions

Is an offset account better than a savings account?+

Usually yes if you have a mortgage, because offset savings are untaxed while HISA interest is taxed at your marginal rate plus Medicare. Offset wins whenever the loan rate beats the after-tax HISA rate, which with current rates is nearly always.

Does money in an offset account still belong to me?+

Yes, it is a deposit account in your name, withdrawable whenever you like, and covered by the government deposit guarantee up to $250,000 per institution. Only the interest calculation borrows the balance.

What is the difference between offset and redraw?+

Offset money is yours in a separate account, while redraw is extra loan repayments the bank lets you pull back at its discretion. Lenders have restricted redraw before; parking $20,000 in offset avoids that risk entirely.

How much do I need in an offset to justify the package fee?+

At a 6% loan rate, you need roughly $6,600 parked for the year to cover a $395 annual fee. Below that, a fee-free loan often comes out ahead; do the maths before paying for the feature.

Should my pay go straight into the offset account?+

Yes. Directing fortnightly pay into the offset and spending from it keeps the daily balance as high as possible, since interest is calculated daily. Even a few hundred dollars of extra average balance compounds into real savings over a 25-year loan.

Disclaimer: This information is general in nature and does not constitute financial or legal advice. Always consult a qualified professional for your specific situation.

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Offset Account