Offset Account Home Loans — Save Thousands

How an Offset Account Reduces Your Interest

An offset account is conceptually simple but extraordinarily powerful over the life of a home loan. It is a standard transaction account linked to your mortgage, and the balance in this account is deducted from your home loan balance when the lender calculates interest each month. You do not earn interest on the offset account — instead, you avoid paying interest on an equivalent portion of your loan.

The mathematics are compelling. On a $600,000 loan at 6.29%, your annual interest charge is approximately $37,740. If you maintain an average offset balance of $80,000 throughout the year, your interest is calculated on $520,000 instead, reducing the annual charge to approximately $32,708. That saving of $5,032 per year compounds dramatically over the life of your loan — potentially saving over $150,000 in total interest and cutting 5-7 years off a 30-year loan term.

The beauty of the offset is that your money remains fully accessible. Unlike making extra repayments (which require a formal redraw to access), funds in your offset account can be withdrawn at any time via card, transfer, or ATM with no fees, delays, or applications. Your savings are working hard to reduce your mortgage interest while remaining available for emergencies, opportunities, or everyday spending.

Why Offset Beats a Savings Account

Many borrowers wonder whether they should keep their savings in a high-interest savings account instead of an offset account. The answer is almost always that the offset is more beneficial, and the reason comes down to tax.

A savings account earning 5.00% interest on a $50,000 balance generates $2,500 in interest income per year. However, this interest is taxable at your marginal rate. If you earn between $45,001 and $120,000, your marginal rate is 32.5% (plus 2% Medicare levy), meaning you pay approximately $862 in tax on that interest. Your after-tax return is $1,638.

The same $50,000 sitting in an offset account against a home loan at 6.29% saves you $3,145 in mortgage interest per year. This saving is not considered income, so there is no tax payable. Your effective benefit is the full $3,145 — nearly double the after-tax return from the savings account, with no tax return complications.

For higher-income earners in the 37% or 45% tax brackets, the advantage of offset over savings is even more pronounced. The offset effectively earns your home loan rate tax-free, which is almost impossible to replicate with any savings or investment product on an after-tax basis.

Maximising Your Offset Strategy

To extract maximum value from your offset account, treat it as the central hub of your daily finances. The more money that flows through the offset — and the longer it sits there — the more interest you save.

Direct your salary to the offset. Your salary should land directly in your offset account rather than a separate savings or spending account. From the moment it arrives until you spend it throughout the month, every dollar is reducing your mortgage interest. On a $100,000 salary paid monthly, you might average $4,000-$5,000 sitting in the offset throughout the month — saving approximately $250-$315 per year in interest just from salary float.

Consolidate your savings. Emergency funds, holiday savings, and any other cash reserves should all sit in the offset rather than in separate savings accounts. You can use a budgeting app or spreadsheet to mentally allocate these funds to different purposes while physically keeping them in the offset working against your mortgage.

Time your bill payments strategically. Pay bills on their due date rather than early. The longer your money sits in the offset, the more interest you save. Set up direct debits for the due date rather than paying weeks in advance.

Use a credit card with an interest-free period. If you have the discipline, using a credit card for everyday spending and paying it off in full from your offset account at the end of the interest-free period keeps more money in the offset for longer. A credit card with a 55-day interest-free period effectively extends the time your salary sits in the offset by nearly two months.

Offset for Property Investors

Offset accounts have special significance for property investors, particularly regarding the tax treatment of their investment loan interest. The key principle is that interest on investment loans is tax-deductible, so investors generally want to maintain the highest possible investment loan balance while reducing their owner-occupied (non-deductible) loan balance.

The strategy is to park all available savings in an offset account linked to your owner-occupied home loan, reducing the non-deductible interest you pay. Your investment loan balance remains untouched, preserving the maximum tax-deductible interest expense. This is more tax-efficient than making extra repayments on the investment loan, which would permanently reduce the deductible balance.

If you own multiple properties, the offset should generally be attached to the loan with the highest non-deductible interest. For most investors, this is their owner-occupied home loan. The principle is simple: reduce non-deductible costs first, preserve deductible costs for as long as possible.