Key takeaways
- Every dollar in an offset account reduces the loan balance your lender charges interest on, so it saves interest at your home loan rate.
- You don’t earn interest in an offset account, so there’s no tax on the saving, unlike interest from a savings account.
- An offset usually pays for itself if you keep a steady balance. If yours is always low, a cheaper loan with redraw may be better.
- If your home might become an investment later, an offset keeps your tax options open in a way redraw doesn’t.
- Check your offset is actually linked: ASIC found banks paid more than $55 million in compensation for offset failures.
An offset account on your home loan is a transaction account whose balance is subtracted from your loan before interest is charged. Keep $40,000 in it and you pay interest as if you owed $40,000 less. Whether an offset account is worth it comes down to three things: how much you keep in it, what the feature costs, and whether your home might become an investment one day. Here’s how it works, with a worked example.
How an offset account works
An offset account works like an everyday bank account. Your salary can go into it, you can pay bills from it and use a debit card. The difference is that it’s linked to your home loan. Most lenders calculate interest daily, and each day they take your offset balance away from your loan balance first.
Moneysmart’s example: with a $750,000 loan and $50,000 in the offset, you’re only charged interest on $700,000. Your repayment doesn’t change, so more of each repayment goes to paying off the loan itself. Over time the loan is paid off sooner and you pay less interest in total.
You don’t earn interest on the offset balance. That sounds like a drawback, but it’s the reason the saving isn’t taxed. Interest from a savings account is income you pay tax on; interest you avoid paying on your home loan is not income at all.
Worked example: what $40,000 in an offset saves
Hypothetical example
A $600,000 home loan over 30 years at a variable rate of 6.20% has monthly repayments of about $3,674.81. Without an offset, total interest over 30 years is about $722,900.
Now keep an average of $40,000 in the offset for the whole loan and leave the repayment unchanged:
- interest in the first year falls by about $2,480 (6.20% of $40,000)
- the loan is repaid in about 26 years instead of 30
- total interest falls by about $179,000.
We worked this out monthly; lenders calculate interest daily and rates change, so real results will differ. It shows the principle: the saving compounds because every dollar the offset saves goes off the loan.
The tax angle makes the comparison with savings stronger. On a 30% marginal tax rate (before the Medicare levy), a savings account would need to pay about 8.9% before tax to leave you as well off as a 6.20% offset. Try your own numbers in our home loan repayments calculator.
When is an offset account worth it?
Offsets aren’t free. Some lenders charge for them through a higher interest rate, an annual package fee, a monthly account fee, or a mix. Moneysmart’s rule of thumb is simple: compare what the feature costs with the interest you expect to save.
For example, a hypothetical $395 a year package fee at a 6.20% rate is covered once your average offset balance is about $6,400. A higher rate is harder to beat: 0.10% extra on a $600,000 loan is about $600 a year.
An offset account usually makes sense if you:
- have a large loan and keep a steady savings balance, such as an emergency fund
- have your pay go straight into the offset so it sits there for as long as possible
- want your savings easy to reach, not locked in the loan
- might rent the property out one day (see below)
It may not be worth it if your balance is usually low (Moneysmart gives under $10,000 as an example) and the offset loan costs more than a basic variable loan with free extra repayments and redraw.
Want to know if an offset pays off for you?
Phillip can compare offset and basic loans across 50+ lenders using your real balances, and show you the difference in dollars.
Offset or redraw: what’s the difference?
Both save interest at your loan rate. They work very differently, and that matters for access, fees and tax.
| Offset account | Redraw facility | |
|---|---|---|
| Where your money sits | In a separate transaction account | Paid onto the loan itself |
| Access | Like any bank account | Depends on the loan terms; some lenders limit, delay or charge for redraws |
| Loan balance | Stays the same; interest is charged on the net amount | Goes down; goes back up when you redraw |
| Tax if the home becomes a rental | Withdrawals aren’t borrowing, so the loan keeps its original purpose | A redraw is a new borrowing, judged by what you spend it on |
| Cost | Often a higher rate or package fee | Usually included in basic variable loans |
Why it matters if your home becomes an investment
The ATO treats money you redraw from a loan as a new borrowing (Taxation Ruling TR 2000/2). Whether its interest is deductible depends on what you use it for. Money you take out of an offset account is your own savings, not a loan, so it doesn’t change the character of the loan (TR 93/6).
Hypothetical example
You borrowed $600,000 to buy your home and paid an extra $100,000 off the loan. Now you’re moving, and you want to rent the old home out and use the $100,000 as a deposit on the new one.
- Paid into redraw: the loan is $500,000. Redrawing $100,000 for your new home is a private borrowing, so the interest on it (about $6,200 a year at 6.20%) isn’t deductible.
- Kept in an offset: the loan is still $600,000, all used to buy what is now a rental. You withdraw your savings for the new home, and the interest on the full loan may be deductible once the property is rented.
The same logic makes offsets popular with investors. If you’re weighing up interest-only repayments too, read our guide to interest-only investment loans, or see how we help with an investment property loan.
Offset accounts on fixed and split loans
Offsets are generally available on variable rate loans. Fixed rate loans often have fewer features, and some don’t allow an offset at all. If you want both certainty and an offset, a split loan lets you fix part of the balance and attach the offset to the variable part. Our blog on fixed or variable home loans explains how to size the split.
Check that your offset account is working
In July 2026 ASIC reported that banks paid more than $55 million in compensation for offset account failures reported between September 2023 and August 2025. In some cases an offset was requested but never linked, so customers paid full interest while their repayments looked normal. ASIC reviewed eight banks and found weaknesses at all of them.
- Check in your app or statements that the offset is linked and shows an interest saving.
- If you can’t see the saving, ask your bank to confirm it in writing.
- Recheck after any refinance, product switch or fixed rate expiry; the link can break.
- If something looks wrong, contact the bank quickly and ask about compensation.
An offset is one of several ways to cut your interest bill. See our guide on how to reduce your home loan repayments, or talk to us about refinancing to a loan with a better offset.
Frequently asked questions
No. Instead of paying you interest, the lender takes your offset balance away from your loan balance before it charges interest each day. The benefit is the interest you don’t pay on the loan. That’s also why the saving isn’t taxed: under the ATO’s ruling on offset arrangements, there must be no entitlement to interest on the offset account for it to work this way.
Compare the extra cost of the offset loan with the interest you expect to save. For example, a hypothetical $395 a year package fee at a 6.2% rate is covered by an average balance of about $6,400. Moneysmart suggests an offset may not be worth paying for if your balance is always low, for example under $10,000, or if the loan’s rate is higher than similar loans.
Offset accounts are generally offered with variable rate loans, and many fixed rate loans come with fewer features. Some lenders offer a partial or full offset on a fixed rate, but it’s less common. A popular workaround is a split loan: fix part of the loan for certainty and link the offset to the variable part, where your savings do the work.
Your offset belongs to your current loan, so it closes or stops offsetting when that loan is paid out. You set up a new offset with the new lender. Moneysmart also warns that switching products with the same lender can break the link between the offset and the loan, so check your statements after any change and ask the bank to relink it if needed.
Both save the same interest per dollar at the same rate. An offset keeps your money separate and easy to reach, and it protects your tax position if the home later becomes a rental. Extra repayments go straight onto the loan, and getting them back through redraw depends on the loan’s terms. If the offset costs more in fees or rate, redraw can come out ahead.
Sources
- Moneysmart: Mortgage offset accounts (opens in a new tab)
- Moneysmart: Pay off your mortgage faster (opens in a new tab)
- ASIC 26-173MR: Hidden mortgage offset failures costing Australians millions in lost interest savings (opens in a new tab)
- ATO: TR 93/6 Loan account offset arrangements (opens in a new tab)
- ATO: TR 2000/2 Deductibility of interest on line of credit and redraw facilities (opens in a new tab)
- ATO: Rental properties, interest expenses (opens in a new tab)
This article is general information only and doesn't take your objectives, financial situation or needs into account. Figures and eligibility rules change; check the official sources above or talk to us before you act. Keystone Home Loans Pty Ltd ATF BEMA Family Trust, Credit Representative Number 564704 is authorised under Australian Credit Licence Number 384704.
Written by
Phillip Bui
Founder and Principal Mortgage Broker at Keystone Home Loans, based in Arncliffe, NSW. Accredited Mortgage Broker and Full Member of the Mortgage & Finance Association of Australia (MFAA).
