How an offset account works
A mortgage offset account is a transaction (everyday) account linked directly to your home loan. The balance sitting in the offset account is deducted from your loan balance before interest is calculated each day. You do not earn savings interest on the offset account — instead, you avoid paying mortgage interest on an equivalent portion of your loan.
Since mortgage rates (5–7%) are typically much higher than savings rates (1–4%), every dollar in offset effectively earns a higher "return" than it would in a standard savings account.
How interest is calculated: $600,000 loan + $80,000 offset
Offset savings by balance — real numbers
At a 5.69% variable rate on a $600,000 loan:
| Offset Balance | Monthly Interest Saving | Annual Saving | Loan Term Reduction |
|---|---|---|---|
| $20,000 | ~$95 | ~$1,138 | ~10 months |
| $50,000 | ~$237 | ~$2,844 | ~2 years |
| $80,000 | ~$379 | ~$4,550 | ~3.5 years |
| $120,000 | ~$568 | ~$6,820 | ~5.5 years |
| $200,000 | ~$948 | ~$11,380 | ~9+ years |
Based on $600,000 loan, 5.69% p.a., 25-year P&I. Actual figures vary by loan size and remaining term.
100% offset vs partial offset
Not all offset accounts are created equal:
- 100% offset: Every dollar in the account reduces the interest-bearing balance dollar-for-dollar. This is what most people mean when they say "offset account." Available on most variable rate loans from most lenders.
- Partial offset: Only a portion (e.g. 40%) of the offset balance reduces the interest-bearing balance. Far less effective — avoid unless you have no choice.
- Redraw facility: Not an offset account. A redraw allows you to withdraw extra repayments you have already made, but does not reduce daily interest calculation in the same flexible way. Useful but not a substitute for a proper 100% offset.
When comparing loans, always check offset terms: Some lenders offer a competitive headline rate but charge an annual fee for offset access ($300–$400/year). On smaller offset balances, this fee can wipe out part of the saving. Check the net benefit after fees for your specific offset balance.
Offset accounts and fixed rate loans
Most lenders do not offer true 100% offset accounts on fixed rate loans. Some offer a limited version with a cap (e.g. offset only applies to the first $20,000 in the account) or a redraw-only facility. This is one of the most important practical reasons many borrowers with significant savings choose variable rates over fixed — the offset value can genuinely exceed the value of rate certainty.
Example: On a $700,000 loan with $100,000 in savings, a 100% offset at 5.69% variable saves $474/month in interest. Moving to a 2-year fixed rate at 5.74% (higher rate, no offset) costs $280/month in extra interest — plus the $474/month you lose from offset disappearing. The variable rate with offset wins by over $750/month in this scenario.
Strategies to maximise your offset
- Salary credit to offset: Have your employer pay your salary directly into the offset account. Your balance is at its highest at the start of each pay period, maximising the daily interest reduction.
- Credit card for daily spending: Pay all expenses on a credit card, leave the balance in offset until the card due date, then pay the card in full. Your offset balance stays higher for longer.
- Park short-term savings in offset: Any cash sitting in savings accounts earning below-mortgage interest rates is working harder in your offset. Holiday savings, emergency fund, upcoming expense savings — all reduce mortgage interest daily until needed.
- Multiple offset accounts: Some lenders allow multiple offset accounts linked to one loan — useful for earmarking funds (emergency fund, holiday fund, renovation fund) while keeping them all working against your mortgage.
Offset accounts and investment properties: the tax trap
A critical caution for property investors: do not use an offset account on an investment loan to hold non-investment savings. If you save personal (non-investment) funds in the offset of an investment loan, you reduce the deductible interest on that loan — which effectively costs you money in lost tax deductions. Investment loan offsets should hold only cash directly related to the investment purpose. Talk to your accountant about the optimal savings structure if you have both owner-occupier and investment loans.