An offset account is a transaction account linked to your home loan. The balance in the account is 'offset' against your outstanding loan balance, reducing the amount of interest charged each day. It is not a separate loan or a special savings product — it functions like a regular bank account — but its ability to reduce the interest you pay on your home loan makes it one of the most valued features in Australian mortgage lending.
How an Offset Account Reduces the Interest You Pay
Interest on an Australian home loan is calculated daily and charged monthly. The daily calculation is: outstanding loan balance × interest rate ÷ 365. An offset account reduces the outstanding loan balance used in that calculation by the amount sitting in the offset account at the time of calculation.
For example: a $600,000 variable rate loan at 6.0% p.a. with $40,000 in a linked offset account. Instead of paying interest on $600,000, you pay interest on $560,000 ($600,000 − $40,000). Annual interest saving: $40,000 × 6.0% = $2,400 per year — without making any additional repayments on the loan. The offset account balance does not reduce your loan balance; it simply reduces the interest calculation, keeping more of your regular repayments applying to principal.
Park All Your Money in the Offset
Maximise the benefit of your offset account by directing your salary into it and paying expenses from it throughout the month. Even funds you know you'll spend within weeks reduce your daily interest charge while they sit in the offset. This is sometimes called the 'salary credit strategy'.
Full Offset vs Partial Offset: What Is the Difference?
A full (or 100%) offset account offsets every dollar in your linked transaction account against your loan balance dollar-for-dollar. This is the standard type offered by most major Australian lenders and is by far the most effective.
A partial offset account only offsets a proportion of your balance — for example, a 40% partial offset on $50,000 in your account would only offset $20,000 against the loan. Partial offset accounts are rarely offered by mainstream lenders today and are generally considered inferior. Always confirm you are getting a 100% full offset account before proceeding.
How Much Can an Offset Account Save Over the Life of Your Loan?
The savings from an offset account depend on three variables: the loan balance, the interest rate, and the average balance you maintain in the offset over time. To illustrate: on a $700,000 variable rate loan at 6.1% p.a. over 30 years, maintaining an average offset balance of $30,000 throughout the loan term reduces total interest paid by approximately $85,000 and cuts the loan term by roughly three years. If that average offset balance were $60,000, the savings exceed $150,000.
These figures assume the offset balance remains constant — in reality, most borrowers see their offset balance grow as their income increases and they save more. The savings compound over time, making the offset account one of the highest-returning 'investments' available to an Australian mortgage holder.
Offset Accounts and Investment Properties
For investment properties, the tax treatment of an offset account is important. Interest on investment loans is generally tax deductible. If you use an offset against an investment loan, you reduce your deductible interest. This can be less tax-effective than using a redraw facility — or keeping your savings in a separate account. Discuss with your accountant before using an offset on an investment loan.
Frequently Asked Questions
About the Author
Sakib Manzoor
Senior Finance Wellness Expert
Sakib Manzoor is the founder of Secure Finance and brings extensive experience in Australian mortgage broking and financial wellness. Specialising in helping clients achieve their property finance goals through personalised strategies and expert guidance, Sakib is FBAA accredited and committed to providing clear, actionable advice. All content is written to meet Australian regulatory standards and is regularly updated to reflect current market conditions.