Offset account
A transaction account linked to your home loan, where every dollar sitting in it cuts the balance you pay interest on.
An offset account works like an ordinary bank account, except the balance is subtracted from your loan before interest is calculated. Keep $30,000 in offset against a $500,000 loan and you are charged interest on $470,000.
Because you are saving interest rather than earning it, the benefit is effectively tax-free. Interest earned in a savings account is taxable income; interest you never get charged is not — which makes offset comfortably better than a savings account at the same rate.
Offset is often confused with redraw. Redraw returns extra repayments you have already made, which legally reduces your loan balance. Offset keeps your money as your money, which matters enormously if the property ever becomes an investment.
$30,000 in offset on a 6% loan
You avoid roughly $1,800 of interest in the first year, tax-free. To match that in a savings account on a 37% marginal rate, you would need to earn about $2,860 in interest before tax.
The bit people get wrong
If you later turn your home into a rental, money withdrawn from redraw can reduce your deductible interest, while money withdrawn from offset does not. Choosing redraw over offset for convenience can cost thousands in lost deductions later.
Common questions
Is an offset account better than paying down the loan?
Financially they save the same interest, but offset keeps the money accessible and preserves your future deductibility. Paying down the principal directly locks the money into the loan.
Do I pay tax on offset savings?
No. You are reducing an expense rather than earning income, so there is nothing to declare — which is precisely what makes it more efficient than a savings account.
Does a partial offset work the same way?
No. A partial offset applies only a portion of your balance against the loan. Always check whether an account is 100% offset before relying on the numbers.
Run your own numbers