Last reviewed October 2026
General information only. It isn’t personal advice. Consider speaking with a licensed adviser and registered tax agent about your situation.
An offset account is a transaction account linked to your home loan, and every dollar sitting in it is taken off the loan balance before the bank works out your interest. With $50,000 in the offset against a loan at 6.5%, you save about $3,250 of interest a year. Because that’s interest you didn’t pay rather than interest you earned, there’s no tax on it, so for someone on the top tax rate of 47% it’s the same as earning about 12.3% in a savings account before tax.
The offset has a second job that matters too. Money kept in an offset leaves the loan itself untouched, so if the home ever becomes an investment property, the whole loan can still be used for tax deductions. Money paid into the loan as extra repayments and later taken back out through redraw (where the lender lets you take back extra repayments) doesn’t work the same way, and that difference can be worth thousands of dollars a year in tax.
How does an offset account work?
A 100% offset account (where every dollar in it counts against the loan) sits beside your home loan as a separate account. You can pay your salary into it, spend from it with a card and move money in and out whenever you like. Each day, the lender subtracts the offset balance from the loan balance and charges interest only on the difference, which is how Moneysmart’s guide to offset accounts describes it too.
On an $800,000 loan with $50,000 in the offset, you’re charged interest on $750,000. Your repayment usually stays the same, so more of each repayment goes to paying down the loan and it ends sooner.
You don’t earn interest on the offset. The ATO treats the offset as reducing the interest you pay, and nothing you save that way is income, so there’s nothing to put in your tax return.
Does an offset account cost more?
Offsets come with some variable loans and not others. Fixed loans often have none, or only a partial offset, where just part of the balance (or a capped amount) counts against the loan. A loan with an offset can cost more through a yearly package fee from the lender or a slightly higher rate, and a higher rate applies to the whole loan, not just the part you offset.
As a rough guide, on a 6.5% loan every $10,000 in the offset saves about $650 a year. A rate 0.10% higher on an $800,000 loan costs $800 a year, so on those numbers the offset only comes out ahead if you’d hold more than about $12,300 in it on average, plus enough again to cover any package fee.
If you’d rarely hold more than a few thousand dollars, a sharper rate with no offset can come out ahead. The Rate Cut Kit shows what a lower rate is worth on your loan, and a mortgage broker can compare loans with and without an offset on your actual balance. Buyers using a small deposit can find more in our guide to first home buyer schemes, which covers setting up the first loan.
Is an offset account better than a savings account?
For most people with a home loan, yes, because savings interest is taxed at your marginal rate (the rate on your top slice of income) and the offset saving isn’t taxed at all. The comparison below is on $50,000, assuming a 5% savings account and a 6.5% home loan rate, which is around the average for new owner-occupier loans after the Reserve Bank lifted the cash rate by 0.25% to 4.60% in September 2026.
On the top rate of 47% (including the Medicare levy), the savings account pays $2,500 of interest, the tax on it is $1,175, and you keep $1,325. The offset saves $3,250 of interest with no tax, so it’s $1,925 a year better. On a 39% rate the savings account keeps $1,525 and the gap is $1,725, and on a 32% rate it keeps $1,700 and the gap is $1,550.
So the higher your income, the more the offset is worth against a savings account. At 47%, a tax-free 6.5% is the same as about 12.3% in a savings account before tax, and no savings account in Australia comes close to that as at October 2026.
What’s the difference between an offset account and redraw?
Redraw lets you take back extra repayments you’ve made into the loan, so on the surface it looks the same as an offset. Both cut the interest by the same amount while the money sits there. The difference shows up at tax time, through three rules.
- The interest on a loan is deductible according to what the borrowed money was used for, not what the loan is secured against, as the ATO’s guide to rental interest expenses sets out
- An extra repayment reduces the loan, so taking it back out through redraw counts as new borrowing, and the ATO says so in its ruling on redraw (TR 2000/2)
- Money in an offset never reduced the loan, so taking it out doesn’t create any new borrowing and the loan’s original purpose stays as it was
Say you have an $800,000 loan on your home and you’ve built up $100,000 of spare cash, then you move out, rent the place and use the $100,000 as a deposit on your next home.
If the $100,000 was in the offset, the loan stays at $800,000, all of it was used to buy what’s now a rental, and all $52,000 a year of interest at 6.5% can be claimed against the rent. If instead you’d paid the $100,000 into the loan and then redrew it for the new deposit, the original borrowing is down to $700,000 and the other $100,000 is new borrowing for your new home. Only the interest on the $700,000 can be claimed, which is $45,500 a year, and the $6,500 on the redrawn slice can’t.
That’s $6,500 less in deductions, or about $3,055 more tax in the first year on the top rate, shrinking only as that slice of the loan is paid down. The interest is claimed against the rent, and under the negative gearing changes starting 1 July 2027, a loss on an established property bought after 12 May 2026 can only be used against property income rather than your salary, so our post on the negative gearing changes is worth reading if that applies to you.
It’s the reason a lot of people keep spare cash in the offset rather than making extra repayments, especially if there’s any chance the home becomes a rental later. A clean loan history also matters if you plan to use debt recycling (paying down the home loan, then borrowing the same amount back through a separate loan split to invest), because the deductible split has to be kept separate from any private borrowing. Whether a particular loan is deductible is a question for your registered tax agent, so take them the loan statements showing every redraw and what each one was used for.
| Savings account | Redraw | Offset account | |
|---|---|---|---|
| Effect on $50,000 a year, at 6.5% loan and 5% savings | Earns $2,500 | Saves $3,250 of interest | Saves $3,250 of interest |
| Tax on the benefit, top rate | $1,175 | None | None |
| What you keep | $1,325 | $3,250 | $3,250 |
| Getting the money out | Any time | Lender’s rules, sometimes a minimum or a fee | Any time, by card or transfer |
| If the home later becomes a rental | No effect on the loan | Money redrawn for private use isn’t deductible | The whole loan keeps its original purpose |
Why does an offset make it harder to save?
The most common problem I see with offsets is that they make it harder to see what you’re saving. In my book Replace Your Salary by Investing I called it the offset account conspiracy. Holding as much of your money as you can in the offset keeps your interest as low as possible, but with all your money in one big pile, you lose sight of how much you’re actually saving. You feel like you have more money, so you spend more.
Kevin and Jenny, clients of ours, had bought their home almost by chance, before they joined Pivot. To keep as much as possible in the offset, they were living on a credit card and paying it off each month, which on paper saved them interest. In practice they were overspending, because the balance in the offset never told them what was spare. Once they joined, they moved to a setup with separate accounts for bills, spending and saving, started saving faster than before, and are now building a deposit for an investment property.
The fix most people use is to let the offset hold the money while separate accounts handle the job of telling you what’s what. Your pay lands in the offset, then on payday a set amount moves automatically to a bills account and a spending account, and whatever stays behind is the amount you’ve saved. Our guide to the bank account budgeting system sets out the accounts and how much goes where, and it’s a once-off setup you review when your pay or your bills change.
How much should you keep in your offset?
Most people are better served by a buffer of three to six months of core spending in the offset, and twelve months if your income is lumpy or your job feels exposed. The buffer is what lets you hold investments through a market fall without having to sell them, so it’s doing real work even when it’s sitting still.
Above the buffer, it’s a choice between a sure return and a higher expected one. The offset saves 6.5% with no risk and no tax. Australian shares have returned 9.0% a year over the 30 years to 30 June 2026 before fees and tax, according to Vanguard’s 2026 index chart, and our guide to long-term investment returns covers what sits behind that number. But share returns move around a lot from year to year, and the tax depends on how you hold them.
There are lots of ways to be right here. A big offset balance makes most sense when you’re close to buying again, your job is uncertain or a rate rise would put you under pressure. Investing more of it makes most sense when your buffer is set, your income is steady and the money has ten years or more to work. Our post on whether to invest or pay off the mortgage runs through that decision, and the honest answer for a lot of people is some of both, revisited every six to twelve months.
Which loan should your offset be linked to?
If you have both a home loan and an investment loan, the offset usually belongs on the home loan. Interest on the home loan isn’t deductible, so every dollar of it you avoid is a full dollar saved. Interest on an investment loan is deductible, so offsetting it mostly reduces your own tax deduction, and on the top rate you’d keep only about 53 cents of each dollar saved.
The same thinking applies to which loan you pay down first. Our post on interest-only investment loans or paying down the home loan works through the numbers over ten years.
How do you set up an offset account well?
A common approach takes about an afternoon, then a quick check-in once a year.
- Check your loan has a 100% offset, and if you have more than one loan, that it’s linked to the home loan
- Have your pay go straight into the offset
- Set up separate bills and spending accounts, with automatic transfers out of the offset on payday
- Set your buffer, three to six months of core spending, and leave it in the offset
- Decide what happens to everything above the buffer, whether that’s investing, saving for a deposit or simply holding it, and review it every six to twelve months
- Before making extra repayments into the loan, ask whether the home could become a rental one day, and if it could, keep the cash in the offset instead
Frequently asked questions
Is an offset account worth it?
For most people with a variable home loan, yes, because the interest you save is tax-free. With $50,000 in an offset against a 6.5% loan, you save $3,250 a year, which on the top tax rate is the same as earning about 12.3% in a savings account before tax. It’s less worth it if you’d rarely hold much in it and the loan costs more for having one.
What’s the difference between an offset account and redraw?
An offset is a separate account, so the loan balance stays the same and taking money out doesn’t change anything about the loan. Redraw takes back extra repayments you made into the loan, which the ATO treats as new borrowing. That matters if the home becomes a rental, because redrawn money used for private spending isn’t deductible.
How much should I keep in my offset account?
Most people keep a buffer of three to six months of core spending, or twelve months if income is variable. Above that, the offset is a safe, tax-free return at your loan rate, and investing the surplus can earn more over the long term with more ups and downs along the way.
Do I pay tax on the interest saved in an offset account?
No. Money in an offset doesn’t earn interest, it reduces the interest you’re charged on the loan, so there’s nothing to declare in your tax return. Interest earned in a savings account is taxed at your marginal rate.
Should my offset be on my home loan or my investment loan?
Usually the home loan. Home loan interest isn’t deductible, so reducing it saves you the full amount. Investment loan interest is deductible, so offsetting it mostly reduces your tax deduction.
Do all home loans come with an offset account?
No. Many variable loans offer one, sometimes for a yearly package fee or a slightly higher rate, and many fixed loans offer none or only a partial offset. Check your loan’s features with your lender or broker.
How Pivot Wealth helps
We look at how your loans, offset and accounts are set up, work out the buffer that suits you, and lay out what to do with the money above it. Pivot Lending can help with the loan structure itself. If you’d like to talk it through, you can book a 10-minute chat.
If you want some help with your money, we’ve created a free seven-day challenge you can use to get more out of your money you can join here and permanently level up your money in just seven days. And if you want to learn how financial advice can help you, you can schedule a quick call here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.