An offset account is a popular home loan feature that can help reduce the interest you pay and potentially pay off your loan sooner by using your everyday savings to offset your mortgage balance.
In this guide, we explain how offset accounts work, how much you could save and whether they are the right fit for your home loan strategy.
What is an offset account?
An offset account is a transaction account linked to your home loan, where the balance reduces the loan amount on which interest is calculated.
Rather than keeping savings in a separate account earning interest, many borrowers use their offset account in its place, which can be more beneficial than the interest a savings account would earn, and the saving is tax-free.
For example, if you have a $500,000 home loan and $50,000 in your offset account, interest is only charged on $450,000 each day rather than the full loan amount. This reduces the interest charged, meaning more of each repayment goes toward paying down the principal and your loan is paid off sooner.
Aside from this, the account works like a regular everyday bank account. You can have your salary paid in, use a debit card for spending and withdraw money at any time. As funds move in and out, the offset balance fluctuates, which means the amount of interest you're charged can change day to day.
In simple terms, the more money you keep in your offset account, the less interest you pay on your home loan.
Most offset accounts in Australia are 100% offset accounts, meaning every dollar in the account reduces your home loan balance in full for interest calculation purposes. Some lenders do offer partial offset accounts, where only a portion of the balance offsets the loan, but these are less common.
How much can an offset account save?
An offset account can reduce both the interest you pay and the time it takes to pay off your home loan. How much you save depends on the amount in your account and how long it stays there.
For example, say you have a $600,000 home loan at 6% p.a. over 30 years.
Here’s how different offset balances could impact your loan:
| Offset balance | Interest saved | Time saved |
|---|---|---|
| $10,000 | $47,981 | 1 year, 1 month |
| $50,000 | $202,175 | 4 years, 8 months |
| $100,000 | $338,658 | 7 years, 11 months |
| Savings calculated using Savvy's home loan offset calculator | ||
Even relatively small balances can make a meaningful difference over time because interest is calculated daily on the reduced loan balance, so savings compound continuously.
The more you keep in the account, the greater the benefit. and that benefit increases further when interest rates are higher, because each dollar in reduces a higher cost.
On top of this, the savings made through an offset account are not taxable, unlike interest earned in a savings account, which is treated as income. This means you keep more of what you save compared to holding the same money in a savings account.
You can use our offset account calculator to see what your own savings could look like based on your loan and balance.
"Keep in mind that an offset account typically attracts a fee. Say you have a $500,000 home loan with a 6% p.a. interest rate and your offset account costs $300 a year to have. You need to have at least $5,000 in your offset just to save $300 in interest and beat the fee you’re charged."
Remember to factor in the fees
Does an offset account reduce your mortgage repayments?
No, an offset account does not usually reduce your mortgage repayments. Instead, it reduces the interest charged on your home loan, which means more of each repayment goes toward paying down the principal. Over time, this helps you pay off your loan faster.
In some cases, lenders may adjust your minimum repayments over time as your interest charges reduce, but this typically happens during scheduled reviews rather than as a direct response to day-to-day changes in your offset balance.
Overall, the main benefit of an offset account is long-term, with less interest paid over the life of the loan and a shorter loan term, rather than an immediate reduction in monthly repayments.
If your main goal is to lower your mortgage repayments, your only real option is to switch to an interest only loan, or refinance to a lower rate or longer loan term.
Should I use an offset account or make extra repayments?
If you have spare cash, there are two main ways to use it to reduce your home loan interest:
- Keep it in an offset account
- Put it directly into the loan as extra repayments
Both lower the balance your interest is calculated on, so the interest saving is the same. The key difference is how easily you can access the money again.
Say you have $30,000 available and want to put it towards your $500,000 home loan.
Option A: $30,000 in an offset account
Interest is calculated on $470,000 from day one, reducing what you pay immediately. The money remains fully accessible at any time. If you withdraw it, the interest saving simply stops.
Option B: $30,000 in extra repayments
This reduces the loan balance to $470,000. However, to access this money again, you would need to use a redraw facility – a feature that allows you to withdraw extra repayments you've made. Access is controlled by the lender and may come with limits, fees or delays.
For borrowers who may need access to the funds, an offset account is generally the more flexible option. For those with certainty they won't need the money back, extra repayments achieve the same result but the loan itself may have lower fees.
Property investors and offset accounts
Property investors often prefer offset accounts to paying down their loan because they make it easier to keep the loan structure simple and avoid complicating tax claims. When you make extra repayments, you reduce the loan balance.
If you later redraw that money for personal use, like a car or holiday, part of the loan can become mixed-purpose, which may affect how much interest you can claim.
With an offset account, the money sits in a separate account instead of being paid into the loan. That means the loan balance stays unchanged, and it’s easier to keep track of what relates to the investment property.
Can you have an offset account with a fixed rate loan?
Most offset accounts are linked to variable rate home loans, though some lenders do offer offset accounts with fixed rate loans.
Where they are available, the offset may be a full 100%, but many lenders instead apply a partial offset, meaning only a portion of your balance reduces the interest charged.
For example, if you had $50,000 in a 40% offset account, only $20,000 would be used to reduce the loan balance for interest purposes, while the remaining $30,000 would not offset your loan.
These loans can also come with higher fees or slightly different pricing, so it’s worth comparing the overall cost, not just the feature itself.
Another common option is a split home loan, where part of your loan is fixed and the remainder is variable. The offset account is usually linked to the variable portion, giving you access to offset benefits while still locking in some rate certainty.
Because features and costs vary widely between lenders, it’s worth running the numbers or speaking with a broker to see what setup actually works best for your situation.
Advantages and disadvantages of offset accounts
Pros
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Reduces interest daily
An offset account reduces the loan balance used to calculate interest each day, which can lead to meaningful savings over the life of the loan.
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Tax-free benefit on your money
Because an offset account reduces interest rather than earning it, there is no interest income to declare. This means the saving is effectively tax-free, unlike savings account interest which is taxed as income.
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Easy access to your money
Unlike extra repayments, funds in an offset account remain fully accessible at any time for emergencies or planned spending.
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Useful for property investors
For investors, keeping funds in an offset account means the loan principal stays unchanged, which can help avoid complications with how interest is treated for tax purposes.
Cons
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May come with higher fees
Offset accounts are often bundled with packaged home loans that charge annual fees and may have higher interest rates. If your offset balance is low, these fees can outweigh the benefit.
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No interest earned
Money in an offset account doesn't earn interest in the traditional sense. Its benefit comes from reducing the interest charged on your loan instead.
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Temptation to spend
Because the funds are readily accessible, some borrowers are more likely to dip in to the balance compared to less accessible savings options.
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Not available on all loans
Offset accounts are less common on fixed rate loans and are usually linked to package-style products, which can come with higher interest rates or additional features you may not need.
How to use an offset account effectively
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Pay your salary straight into it
Having your salary paid directly into your offset account means your money starts reducing interest immediately.
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Time your bill payments
Where possible, wait until bills are due before paying them. The longer your money sits in the offset, the more interest you save.
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Use a credit card to stretch your cash flow
Use a credit card for everyday spending and leave the cash in your offset, then clear the card in full before the due date. This keeps more money offsetting your loan for longer. Note that this only works if you pay the card off in full each month as carrying a balance will cost more in credit card interest than you save.
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Keep your savings in the offset
Instead of parking savings or emergency funds in another account, keep them in your offset so they reduce your home loan interest instead.
Is an offset account right for me?
An offset account can be a great tool, but it’s not the right fit for everyone. The value comes down to how you manage your money, how much you hold in the account, and what you want from your home loan.
An offset account may suit if:
- You keep a decent balance in the account: the benefit grows with your average balance. For example, someone consistently holding $50,000 in an offset will save far more interest than someone whose balance sits below $10,000. As a rough guide, if the interest you save each year is more than the annual fee, the offset is likely working in your favour.
- You want easy access to your money: if you like knowing your savings are available for emergencies, renovations or investments, an offset account gives you that flexibility without changing your loan structure.
- You’re a property investor: offset accounts can help keep your loan structure cleaner for tax purposes because the loan balance itself isn’t reduced when you access your money.
- Your income isn’t always consistent: if you receive bonuses, commissions or seasonal income, an offset account lets you park that money and reduce interest in the meantime, even if only temporarily.
However, an offset account may not be worth it if:
- Your balance is usually low: if you’re only keeping a small amount in the account, the savings may not outweigh the annual package fee. In that case, a basic loan with no offset and the ability to make extra repayments could be more cost-effective.
- You’re choosing a fixed rate loan: most fixed rate loans don’t offer full offset accounts, so if locking in a rate is your priority, an offset may not be an option anyway.
- You find it hard to leave savings untouched: if having easy access tends to lead to spending, you may get better long-term results from less accessible savings options or by making extra repayments instead.
If you’re not sure what suits your situation, a mortgage broker can help compare options and work out whether an offset account is actually worth it for your loan structure and long-term plan.
