Last reviewed: November 9, 2026 · MortgageCompass Editorial Team · How we research
An offset account is worth it when the cash you keep in it saves more loan interest than the extra cost of the loan that comes with it. That extra cost is usually a package fee, a slightly higher rate, or both. With a few thousand dollars sitting there, it rarely pays. With tens of thousands sitting there most of the month, it usually does, and the interest it saves is not taxed.
How an offset account works, in one daily sum
A mortgage offset account is an everyday transaction account linked to your home loan. You do not earn interest on the money in it. Instead, the lender subtracts the balance from your loan before it works out the interest. Moneysmart uses a simple example: with a $500,000 loan and $20,000 in the offset, you are charged interest on $480,000.
Because interest on most Australian home loans is calculated daily, what matters is the balance in the account every day, not the figure on the last day of the month. That is why many borrowers have their pay land in the offset and leave it there as long as possible. Your repayment usually stays the same, so the interest you avoid goes towards paying down the loan faster.
Illustration with a fortnightly pay cycle. The lender looks at the balance each day, so the dashed average is the number that saves you interest. Spending from a credit card that you clear in full each month keeps the line higher for longer, but only works if you never carry a card balance.
Two details change the maths. A 100% offset counts every dollar in the account, while a partial offset counts only part of it. And offset accounts are generally offered on variable-rate loans; some lenders allow them on fixed loans with limits, so check the product terms before assuming yours works in full.
The arithmetic in plain dollars
Here is the core comparison most people miss. Money in an offset “earns” your home loan rate, and that saving is not taxable income. Money in a savings account earns the savings rate, and the ATO treats that interest as assessable income. So the fair comparison is your loan rate against the savings rate after tax.
A worked example, using Canstar’s estimated average owner-occupier variable rate of 6.74% after the November increase, an example savings rate of 5.00%, and a taxpayer on the 30% bracket plus the 2% Medicare levy (32% in total):
The break-even rule of thumb. The average balance you need for the offset to pay for itself is roughly:
(annual fee + extra interest from any rate premium) ÷ (loan rate − savings rate after tax)
With only the $395 fee in the example above, the answer is about $11,800. If the offset loan also costs 0.25 percentage points more on a $600,000 loan, that adds $1,500 a year and the break-even jumps to about $56,700. The rate premium usually matters far more than the fee.
The 6.74% is Canstar’s estimate quoted by Australian Broker on 3 November 2026. The 5.00% savings rate and the 0.25-point premium are examples, not market averages. The $395 is Westpac’s published annual package fee, used here because it is a typical published figure.
The three-way ledger: offset, savings or redraw?
The quick formula ignores time, growing balances and the fact that a cheaper loan has a lower repayment. The ledger below runs all three choices month by month with the same cash leaving your account each month, so the only things that differ are rates, fees and tax. If you just want the interest and time an offset saves on one loan, the offset calculator in our home loan rates guide does that; this tool answers the different question of whether the offset is the best place for your cash.
Where should your spare cash sit?
Loan with offset
- Loan interest
- $0
- Fees
- $0
- Savings interest after tax
- $0
Basic loan + savings account
- Loan interest
- $0
- Fees
- $0
- Savings interest after tax
- $0
Basic loan, cash paid in (redraw)
- Loan interest
- $0
- Fees
- $0
- Savings interest after tax
- $0
How it works: each route pays the same amount out of your pocket every month. Route A pays its repayment and fees and adds your monthly extra to the offset. Routes B and C pay the cheaper repayment, then put the difference plus your extra into savings (B) or straight onto the loan (C). Interest is modelled monthly, so real daily-interest figures will differ slightly. “Net position” is cash held minus loan owed at the end. Example defaults only; this is not a quote or advice.
Two things the ledger cannot price. Route C usually wins on paper when the basic loan is cheaper, but money paid into a loan is only available through redraw, which the lender can limit, and for investors it can create a tax problem (more on that below). Route B keeps your cash completely separate from the bank that holds your mortgage, which some people value for its own sake.
Offset vs redraw vs savings account
| Feature | Offset account | Redraw facility | Separate savings account |
|---|---|---|---|
| What your cash “earns” | Your loan rate, as interest avoided | Your loan rate, as interest avoided | The savings rate |
| Tax on that benefit | None, you are paying less interest | None, you are paying less interest | Interest is assessable income |
| Access to the money | Like any transaction account: card, transfers, bills | Depends on loan terms; lenders can limit or change redraw | Usually easy, some accounts have conditions |
| Typical extra cost | Package fee or higher rate on some loans | Often included on basic variable loans | Often none; bonus rates may have conditions |
| Government deposit guarantee | Covered when it is a separate deposit account (up to $250,000 per person per bank) | Not a deposit: the money is a loan repayment | Covered up to $250,000 per person per bank |
| If the home later becomes a rental | Loan balance stays intact, which helps keep interest deductible | Redrawing for private use can make part of the interest non-deductible | Neutral |
Deposit guarantee details from APRA’s Financial Claims Scheme page; tax treatment from the ATO. Lender terms vary, so check your own loan documents.
When an offset pays, and when it does not
Usually worth it if
- You keep a meaningful balance most of the month, such as an emergency fund, a saved deposit for renovations, or your pay before bills.
- Your loan is large, so even a modest balance offsets a real amount of interest.
- You are on a higher tax bracket, which makes taxed savings interest less attractive.
- You might rent the property out later and want the loan balance kept intact.
- The offset loan costs little or nothing extra compared with a basic loan from the same lender.
Often not worth it if
- Your balance is usually low, so the fee or rate premium outweighs the saving.
- The loan with offset charges a noticeably higher rate than a similar loan without one.
- You are fixing the whole loan and the lender does not allow a full offset on fixed rates.
- Having savings in your everyday account makes you more likely to spend them.
- The “credit card strategy” would tempt you to carry a card balance; Moneysmart notes card rates average around 18%.
Not sure which loan type you want yet? Our fixed vs variable guide for Australia covers split loans, which can keep an offset on the variable part while fixing the rest.
Investors: why accountants talk about offset, not redraw
The ATO decides whether loan interest is deductible by looking at what the borrowed money is used for. That makes the difference between an offset and redraw matter if a property earns rent now or might later.
Redraw for private spending. In an ATO example, a rental property owner redraws $9,500 from surplus repayments to buy a TV and furniture. From then on, interest has to be split between the rental part and the private part of the loan, and only the rental part is deductible.
Cash parked in an offset. Money in an offset never pays down the loan, so the loan keeps its original purpose. If you later move out and rent the home, the full loan is still the money you borrowed to buy it. Taking cash out of the offset does not count as new borrowing.
The ATO also notes that extra payments to reduce the principal are not deductible, and that interest on any loan amount used for private purposes cannot be claimed. Rules on mixed-purpose loans sit in Taxation Ruling TR 2000/2. If you own or plan to own an investment property, ask a registered tax agent to check your set-up before you redraw anything.
Is your offset actually working? A 4-step check
In a review published in July 2026, ASIC looked at eight banks covering more than 70% of the home loan market and 204,000 loans settled between March and August 2025. Banks had paid more than $55 million in compensation for offset failures reported between September 2023 and August 2025. The most common failures banks identified:
- Find the link on paper. Your loan statement or app should name the offset account linked to the loan. If it does not, ask the lender in writing.
- Test one month’s interest. Take the loan balance minus your average offset balance, multiply by your rate and divide by 12. The interest charged should be close to that figure, not to the full loan balance times the rate.
- Confirm 100% or partial. Check the product terms for how much of the balance counts.
- Re-check after any change. Refinancing, a rate switch, a split or a new account are the moments when links get missed. If something went wrong, ask the lender to fix it and refund the extra interest; if they do not, you can complain to AFCA.
Questions readers ask
Do I earn interest in an offset account?
No. You avoid interest on the loan instead. For most people that is better than earning the same amount, because interest avoided is not taxed while savings interest is.
Can I have more than one offset account?
Some lenders allow several. Westpac, for example, allows up to 10 offsets on one of its variable loans under its package. Check your lender’s terms.
Does an offset lower my repayments?
Usually not. The repayment stays the same and more of it goes to principal, so you pay the loan off sooner. Some lenders can recalculate repayments on request.
Is money in an offset protected if the bank fails?
APRA lists offset accounts that are separate deposit accounts as covered by the Financial Claims Scheme, up to $250,000 per account holder per bank. Money paid into the loan through redraw is not a deposit.
Should I pay the loan down instead?
If the basic loan is cheaper and you are sure you will not need the money, paying it in can save slightly more. You give up easy access and, for investors, possibly tax deductions. Use the ledger above with your numbers.
Does an offset help me borrow more?
Not directly. Lenders assess borrowing power from income, expenses and buffers. See our guide to how much you can borrow in Australia.
An offset is a good deal when your average balance is comfortably above your break-even, and an expensive habit when it is not. With the cash rate at 4.85% and variable rates around the high sixes, each dollar sitting in an offset saves more than it did a year ago, but so does each dollar of rate premium you pay for the feature.
- Work out your average daily balance from the last three months of statements.
- Ask your lender for the rate on the same loan without an offset, plus any fees.
- Run both through the ledger above and look at your break-even.
- If you already have an offset, do the 4-step check this week.
Buying your first home? Our guide to first home buyer loans and schemes by state covers grants and guarantees that can change which loan suits you.
Sources
- Moneysmart (ASIC): Mortgage offset accounts
- ASIC: Overview of mortgage offset accounts in Australia (infographic)
- Australian Broker: Mortgage offset failures cost borrowers millions, ASIC review finds (29 July 2026)
- Savings.com.au: RBA lifts cash rate to 4.85% (November 2026)
- Australian Broker: Fifth RBA hike ends sub-6% variable rates (3 November 2026), citing Canstar
- ATO: Interest expenses for rental properties
- ATO: Investing in bank accounts and income bonds
- APRA: Types of accounts covered under the Financial Claims Scheme
- Pitcher Partners: 2026-27 resident personal tax rates
- Westpac: Home loan package (annual fee and offset limits)