Skip to content

Offset account 101: how much interest it really saves

An offset account is a transaction account linked to your home loan. The balance of the offset is subtracted from your loan balance for interest calculation purposes, so $50,000 sitting in offset means you pay interest on $650,000 of a $700,000 loan - not on the full $700,000.

The compounding effect is the point

Interest on Australian home loans is calculated daily and charged monthly. Every dollar in your offset reduces that day’s interest. Because the loan compounds monthly, saving interest today means a slightly smaller principal next month, on which interest is then calculated, and so on. The effect compounds over the life of the loan.

A worked example

A 30-year, $700,000 loan at 6.10%:

  • No offset: monthly repayment ~$4,242, total interest over 30 years ~$827,000
  • $50,000 constant in offset: monthly repayment unchanged (it’s fixed by the loan size), but total interest drops to ~$672,000 - a saving of $155,000
  • And the loan pays off ~3 years earlier

The big number is not “the $3,050 a year in interest saved” - it’s the compounding effect over three decades.

Where the offset dollar should come from

Clients often ask whether to use spare cash to (a) pay down the loan, (b) park in offset, or (c) invest elsewhere. At current rates, offsetting a 6% home loan is mathematically equivalent to earning 6% tax-free. That’s a very high hurdle for any alternative investment to beat.

For most households, the order is:

  1. Build an emergency buffer of 3-6 months expenses in offset
  2. Maximise offset balance up to the full loan amount (at which point the loan pays itself off)
  3. Only then consider direct investment

The tax angle

Unlike paying down the loan, money in offset is still yours. You can withdraw it tomorrow. And the “interest saved” isn’t taxable income, so the return is effectively tax-free. This makes offset the most tax-efficient place for liquid savings in Australia.

The cost

Offset accounts typically require a packaged home loan, which costs $395-$500 a year. If your loan is under about $300,000, the package fee can outweigh the offset benefit. Above $300,000 it’s nearly always worth it.

When offset beats redraw

Offset funds are legally yours - they sit in a transaction account in your name. Redraw is money you’ve already repaid to the lender. If you plan to convert your owner-occupier home to an investment later, keeping savings in offset (rather than paying them off) preserves the ability to draw them out and still deduct interest on the full loan. That tax positioning alone is worth the package fee for most investors.