How Offset Accounts Work in Australia

An offset account is a transaction or savings account linked to your home loan. Rather than reducing your loan balance directly, the offset account balance is "offset" against your loan balance each day when calculating interest.

Example: You have a AU$600,000 home loan at 6.2% and AU$40,000 sitting in your offset account. Interest is calculated on AU$560,000 ($600,000 minus $40,000).

Monthly interest on AU$600,000 at 6.2%: approximately AU$3,100 Monthly interest on AU$560,000 at 6.2%: approximately AU$2,893 Monthly saving: approximately AU$207

Your minimum required repayment stays the same — but more of each payment goes to principal rather than interest, so your loan pays off faster.

Always choose a full offset account over a partial offset. Here's why:

Full offset: Every dollar in the offset account reduces your loan balance for interest calculation by the full dollar. AU$50,000 in a full offset on a AU$600,000 loan = interest on AU$550,000.

Partial offset: Only a percentage of the offset balance is applied — typically 40% to 80%. AU$50,000 in a 50% partial offset = only AU$25,000 offset, so interest on AU$575,000.

Partial offset accounts are largely obsolete and exist mainly on older loan products. If your current loan only offers partial offset, it's likely worth refinancing to access full offset.

Both reduce the interest you pay. The key differences:

Offset account: — Money stays in a separate bank account, fully accessible at any time — Can be used as your everyday transaction account — The full savings are visible and accessible immediately — Generally comes with a debit card — Interest reduction is calculated daily

Redraw facility: — Extra repayments sit inside the loan account — Access to redrawn funds is at the lender's discretion and may require application — Some lenders charge redraw fees or have minimum redraw amounts — Feels more "locked away" — useful for borrowers who might spend accessible savings — May not be available on all loan products

For owner-occupiers: both work well, offset is more flexible. For investment property owners: offset is strongly preferred — it allows you to maintain the deductible loan balance while parking cash efficiently. Redrawing from an investment loan can create tax complications with mixed-purpose debt.

Get the most from your offset by treating it as your primary transaction account. Have your salary paid directly into the offset account and pay all expenses from it. The longer your money sits in the offset account each month before bills are paid, the more interest you save.

Consolidate savings. If you have a high-yield savings account earning 5%, consider moving it to your offset earning 6.2% (your mortgage rate). You're earning more "interest" by reducing a higher-rate expense.

Avoid spending up to your offset balance. The offset is most powerful when kept as high as possible. Resist the temptation to treat the accessible balance as spending money.

Review your loan product regularly. Not all lenders offer full offset, and offset-linked loans often carry slightly higher rates. Compare the rate premium against the offset savings to ensure you're getting value — a 0.2% rate premium is usually justified for access to a full offset.