How does an offset account work?

It's a transaction or savings account linked to your home loan. The bank subtracts the offset balance from your loan balance before calculating interest, so $50,000 in an offset on a $500,000 loan means you're charged interest as if you owed $450,000.

Does an offset account reduce my loan balance?

No. Your loan balance stays the same. What drops is the amount the bank charges interest on, which means more of each repayment goes toward paying down the principal.

Is an offset account better than a savings account?

It often can be, because the interest you save isn't taxed the way interest earned in a savings account is. It also stays your money, so you can use it whenever you need it.

Can I have more than one offset account?

With some lenders, yes. Multiple offsets let you bucket your money for bills, savings and goals, with all of them reducing the interest on your loan. Not every lender offers it.

Does an offset account affect tax on an investment property?

An offset generally doesn't affect the tax deductibility of an investment loan the way redraw can. Check your set-up with your accountant.

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What is an offset account?

Bayley Clarke · Mortgage broker on the road · Last checked 16 October 2026 · 4 min read

The short answer

An offset account is pretty much just another account, like your savings or your transaction account, except it's linked to your home loan. Before the bank calculates how much interest to charge you, it looks at the balance in your offset first.

So if you've got a $500,000 loan and $50,000 in your offset, you get charged interest as if your loan was only $450,000. It's still your money, you can still spend it, but while it sits there it's cutting the interest you pay.

The two minute version, filmed from the driver's seat. The rest of this page is the detail underneath it.

How the bank does the maths

Here's a nice simple example. You've got a $500,000 loan and you've got $50,000 sitting in your offset account. Before the lender goes, hang on, your loan's $500,000, let's charge you interest on that, they look across and go, oh, there's $50,000 in the offset. Okay, let's redo the numbers.

They're only going to charge you interest based on the difference between what you owe on your home loan and the balance in that offset account. So in this example, you get charged interest as if your loan was only $450,000. The loan balance itself doesn't change. What changes is how much of it the bank gets to charge you interest on. And because it's interest you're not being charged, rather than interest you're earning, there's no tax on it the way there would be on interest from a savings account. That's the part people miss when they compare an offset to a high interest savings account.

Why it matters more early on

The reason it's important to use one is the way compounding interest works on a home loan. When you first get your loan, your repayments are a lot of interest and very little principal. Most of what you pay in the early years is going to the bank, not to paying down what you owe.

The more you can keep in your offset, the more it changes that equation. Less interest gets charged each month, so more of your repayment goes to the principal from earlier on. Your repayment doesn't change, but more of it is doing the work of paying the loan off instead of going to the bank in the form of interest. That's how an offset quietly shortens a loan without you doing anything different.

How to get the most out of it

It's very important to keep a disciplined savings pattern and keep growing the balance in your offset account. Pay goes in, bills come out, and whatever's left keeps working for you every day it sits there. That builds you options. Either you use it to pay off your home loan a lot faster, or it becomes your buffer for when you want to go and do the next thing, whether that's a renovation, an emergency or the deposit on the next property. Either way, the money's been saving you interest the whole time it was sitting there.

Offset accounts aren't all built the same. Some lenders let you have more than one, so you can bucket your money. Some give you a debit card and full everyday banking, others are more limited. That's worth checking before you pick a loan, not after.

The honest bit: an offset only works if the money stays there

An offset is only as good as the balance in it. If your pay goes in and it's all gone by the end of the week, it isn't doing much. The benefit comes from discipline, not from the account itself.

On investment properties, an offset doesn't mess with the tax deductibility of the loan the way redraw can. I'm not an accountant though, so if you've got an investment property in the mix, run your set-up past yours before you move money around.

Want to see what an offset would save on your loan?

A 30 minute call. We look at your loan, what you'd realistically keep in an offset, and whether the loan you're on is giving you the right one.

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Next question

What is redraw?

Redraw is extra money paid onto your home loan. It cuts interest like an offset, but it's the bank's money until you ask for it back, and it can.