An offset account is one of the most practical and widely misunderstood mortgage features in Australia. Used correctly, it can save tens of thousands of dollars in interest and shave years off your loan — without requiring you to make a single extra repayment.
An offset account is a transaction or savings account linked to your mortgage. The balance in the offset account is subtracted from your outstanding loan balance before interest is calculated. If you have a $500,000 mortgage and $50,000 sitting in your offset account, you only pay interest on $450,000.
Your minimum repayment amount does not change — but because less of each repayment goes to interest (the principal component remains the same or increases), the loan is paid down faster. Over time, the compounding effect is significant.
Loan: $600,000 at 6.5% over 30 years. Standard monthly repayment: approximately $3,792.
The key word is "average" balance. The higher the average balance maintained, the greater the offset benefit. Keeping your salary, savings, and any lump sums in the offset account maximises this effect.
A full offset account reduces your loan balance by 100% of the account balance for interest calculation purposes. A partial offset (less common) only reduces the loan balance by a percentage — for example, a 40% partial offset on $50,000 would reduce the assessed loan by $20,000. Always check whether an offset is full or partial. Partial offset accounts offer significantly less benefit and are usually not worth the higher fees some lenders charge for premium offset products.
An offset account and a redraw facility both reduce the interest you pay, but they work differently. An offset account holds your money in a separate account you can access freely, like any transaction account. A redraw facility holds your extra repayments inside the loan — you can redraw them, but with less flexibility. For most borrowers, offset is more flexible and therefore more useful. See the Redraw Facility guide for a full comparison.
If you have an investment property loan, do not use an offset account linked to that loan for personal funds. The ATO applies a "purpose test" — if personal funds are mixed with investment funds in a way that reduces the deductible interest, you may not be able to claim the full interest deduction. Investors should keep their offset account for investment-related funds only, or use a separate loan split for personal savings. Get advice from a tax accountant before structuring this.
Maximise your offset balance: Have your salary direct deposited into your offset account. Pay all expenses by credit card and pay the credit card in full each month. This keeps the maximum amount in the offset for the longest possible time, maximising the interest reduction every day of the billing cycle.