Offset accounts, explained
An offset is a separate account linked to an eligible home loan. Its balance reduces the amount of the loan charged interest. It can help you keep cash accessible while reducing interest, but the account terms and total loan cost matter.
The mechanism
A smaller balance for the interest calculation
If a $500,000 home loan has $20,000 in a linked 100% offset, interest is calculated on $480,000 while those balances apply. The loan still owes $500,000: the offset has not made a repayment.
Home-loan interest is commonly calculated on daily balances. Money that stays in the offset for a full month has more effect than the same amount held for one day. If your pay arrives and bills leave soon after, the daily balances matter more than the payday peak.
Moneysmart’s offset guide explains the interest calculation and the cost and access questions to check.
Read your statement
Why the repayment can stay unchanged
Consider an illustrative $500,000 loan at 6%. Using annual interest divided by twelve, interest is $2,500 in a month without an offset. With a constant $20,000 offset, that becomes $2,400. If the payment is $3,200 in both cases, principal falls by $700 without the offset and $800 with it.
- Illustrative repayment
- $3,200
- Interest with the offset
- $2,400
- Principal repaid
- $800
This simplified example is not a statement reconciliation: actual interest depends on daily balances, day counts and lender rules. Look at the interest charge and remaining balance as well as the debit amount. If the benefit is unclear, work through the offset check.
For an interest-only loan, the relationship between interest and the required payment can differ. Confirm your repayment type and terms rather than assuming the principal-and-interest example applies.
The cost question
An offset feature can cost more than it saves
Compare the whole loan. An offset option may have a different interest rate, an account fee or a package fee. The balance that covers a fee alone will not necessarily cover a higher rate on the rest of the loan.
For an illustrative $600,000 balance, a basic loan at 6% and an offset loan at 6.1% with an extra $395 annual fee, the offset needs about $16,312 on average to cover the difference in a constant-balance annual comparison. At $20,000, the estimated benefit is $225 for the year.
Use the offset worth-it calculator to compare your own offers. The offset repayment calculator answers a different question: how a starting balance and regular deposits affect a single loan over time.
Where the cash sits
Offset, redraw and loan repayment
An offset holds cash in a separate account. Extra repayments reduce the loan itself; accessing that money again depends on any redraw facility and its conditions. Check transfer limits, fees, restrictions and how access works for joint borrowers.
Compare offset and redraw in detail. If you have several offset accounts, confirm which are eligible and how the lender combines their balances. A budget label in your banking app does not establish the loan link.
Once offset cash covers the remaining debt, the loan is fully offset rather than paid off. Understand what happens next before cancelling repayments or closing accounts.
Common questions.
Does an offset reduce my monthly repayment?
It reduces the interest charged. For many principal-and-interest loans, the scheduled repayment stays the same and more of it reduces the debt. Repayment changes depend on your lender and loan terms; check before changing your direct debit.
Can I keep more money in the offset than I owe?
You may be able to hold more than the loan balance, subject to account terms, but a full offset cannot reduce the interest-bearing loan balance below zero. Excess cash does not create extra mortgage interest savings.
Are all offsets 100% offsets?
No. Some products offset only a portion of the balance. Confirm the offset percentage, eligible loan split, fees and access rules with your lender.
Is an offset always better than redraw?
No single choice suits every borrower. Offset cash stays in a separate account; redraw is access to extra repayments already made on the loan. Compare costs and access conditions, and get tax advice if the property use or borrowing purpose may change.
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