An offset account is a transaction account linked to your home loan whose balance offsets the loan principal for interest calculation purposes. Every dollar in the offset account reduces the loan balance the bank charges interest on, but doesn't actually pay down the loan.
How it works
The bank calculates daily interest on (loan balance − offset balance). If you have a $600,000 home loan at 6% interest and $50,000 sitting in your offset account, the bank charges you interest on $550,000 — roughly $33,000 per year instead of $36,000. That $3,000 saving is permanent for as long as the offset balance is in the account.
The offset account works like a normal everyday transaction account — you can deposit your salary, pay bills, transfer in and out at any time. The balance fluctuates day-to-day, and the interest saving fluctuates with it.
Offset vs redraw
Offset and redraw both reduce interest, but operate differently:
| Offset | Redraw | |
|---|---|---|
| Where the money sits | In a separate transaction account | Inside the loan account |
| Accessibility | Like a normal bank account | Requires a withdrawal step (online, often free; sometimes fee'd) |
| Effect on loan balance | Loan balance unchanged | Loan balance reduced; redrawing increases it back |
| Tax implications for investment property | None — clean separation of personal and loan funds | If redrawn for personal use, contaminates the deductibility of loan interest |
| Available on fixed rates | Rarely | More commonly |
For investment property owners, offset is strongly preferred because redrawing changes the use of the loan funds and can affect tax deductibility.
100% vs partial offset
A 100% offset means every dollar in offset reduces interest dollar-for-dollar. A partial offset (commonly 40%, 50%, or 80%) reduces interest by only that fraction of the offset balance. Most standard variable home loans offer 100% offset; some basic or lower-rate products offer partial or no offset.
The trade-off: 100% offset products usually come with slightly higher interest rates or annual package fees. Whether it's worth it depends on the offset balance you'll typically hold — if you'll usually have $30K+ sitting in offset, the saving outweighs the fee.
When an offset account is worth it
The economics work when your typical offset balance × your interest rate > the annual fee:
- $20,000 balance × 6% = $1,200/year saved. A $300 annual package fee leaves $900 net benefit.
- $50,000 balance × 6% = $3,000/year saved. Strongly worth it.
- $5,000 balance × 6% = $300/year saved. Just covers a typical fee — depends on whether the package's other features (credit card, fee waivers) add value.
For first home buyers with small balances, a no-fee basic loan often beats an offset product. As balances grow, the math flips toward offset.
For most borrowers, the Offset Account Calculator models the exact interest saving over the life of the loan based on your specific balance and rate.
Common use cases
- Salary parking: deposit your salary into offset and pay bills from it through the month — the daily balance averages higher than a regular account, maximising interest savings.
- Emergency fund: 3–6 months of expenses sitting in offset earns the "interest saved" return tax-free, beating a savings account for most earners.
- Tax reserves: self-employed or investor owners parking quarterly BAS / annual tax estimates in offset.
- Renovation / car / deposit savings: any savings goal where the money is committed but not yet spent.
For the calculator that shows your specific interest saving and reduction in loan term, see the Offset Account Calculator.
Frequently asked questions
How does an offset account actually save you money?
The bank calculates daily interest on (loan balance − offset balance) rather than the full loan balance. $50,000 sitting in an offset account against a $600,000 loan at 6% interest means you're charged interest on $550,000 — saving roughly $3,000 in interest per year that would otherwise be charged on the full $600,000. The saving compounds over the life of the loan.
Is an offset account better than just paying down the loan?
Mathematically the same — the interest saving is identical. But offset preserves flexibility: the money is still yours, accessible like a normal transaction account. Paying directly into the loan locks the money into the loan balance, only retrievable via redraw (which has tax implications for investment properties). Most Australian borrowers use offset for emergency funds, savings goals, and salary deposits to keep cash liquid while still saving interest.
What's the difference between 100% offset and partial offset?
100% offset means every dollar in the offset account reduces interest dollar-for-dollar. Partial offset means only a portion (often 50% or 80%) counts. Some lower-rate basic home loans offer partial offset; most standard variable loans offer 100% offset. The advertised interest rate may be slightly higher on a 100% offset product — the calculation is whether your offset balance saves more in interest than the rate difference costs.
Are there fees for an offset account?
Most major lenders charge an annual package fee ($300–$400) that includes an offset account, plus credit cards and other features. Some no-fee loans offer offset without a package, but typically at a slightly higher interest rate. Worth doing the math: if your offset balance × rate-saved > the annual fee, the offset is worth it. For balances above $20K–$30K this is almost always the case.
Can I have multiple offset accounts on one home loan?
Some lenders allow it (Macquarie, ING, several smaller banks), others don't (Commonwealth Bank's standard product allows only one). Multiple offsets let you bucket money for different purposes — emergency fund, holiday savings, tax reserves — while still earning the full offset benefit. Useful for organised savers; not essential.
Does an offset account work on a fixed-rate loan?
Rarely. Most fixed-rate home loans in Australia don't offer 100% offset — sometimes a partial offset is available, sometimes none at all. This is why split loans (part fixed, part variable with offset) are popular: you get the rate certainty of fixed while keeping the offset benefit on the variable portion.
Is offset interest taxable?
No. The interest you save through an offset account isn't taxable because it's not interest you've earned — it's interest you haven't been charged. Compare this to a savings account where the interest paid to you is taxable at your marginal rate. For high earners, $3,000 saved in offset is worth more than $3,000 earned in a savings account that would lose 30–45% to tax.
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Last updated: 16 May 2026