Understanding how to use an offset account can help you pay off your home loan faster
Your home loan is probably the biggest financial commitment you'll make in your lifetime. So what if there was a way to reduce the amount it costs – the interest you pay – and also pay it off sooner?
Read in his article
- In a nutshell
- Here's how it works
- How easy is it to redraw funds from an offset account?
- 'Should I save in a savings account or save in a mortgage offset account?'
- What to look for in a high-quality mortgage offset account?
- What's the main difference between an offset account and a redraw facility?
- Frequently Asked Questions: Mastering the Offset Strategy
It's called an offset account and it could save you thousands of dollars if you use it correctly.
In a nutshell
It's really very simple. An offset account is like an everyday bank account that is linked to your mortgage. Every dollar you have in that account offsets the balance of your loan – reducing the amount of interest you pay every month. This means you pay interest on your home loan balance minus the amount in the offset account.
- Because these savings add up over time, you can also use this 'extra' money to pay your loan off faster. So the higher the balance in your offset, the more you save on mortgage repayments
- Keeping your average balance as high as possible saves you more
Around half of all home loans in Australia have an offset account attached to the mortgage and they are usually only available with a variable-rate home loan.
ProTip: Better quality home loans provide offset accounts on fixed-rate home loans as well.
Here's how it works
Let's say you have a home loan of $400,000 with an interest rate of 6% and you have $20,000 in your offset account. The combined effect of these two linked accounts will be you'll only pay interest on $380,000. Over the life of a 30-year loan, you can save more than $87,000 in interest, and shave more than three years off your loan.
All because you have kept that extra $20,000 in the right account - an offset account, linked to your mortgage.
How easy is it to redraw funds from an offset account?
What if you need to use that $20,000 for an emergency? Well, you can – because a mortgage offset account is just like an everyday savings account. You have access to your extra funds at any time (although you'll reduce the amount of interest you're saving if you do).
'Should I save in a savings account or save in a mortgage offset account?'
This is a common question people ask. Think of it like this;
- Everyone has to pay tax on any interest earned on their savings
- Let's say you inherit $20,000 and put that money into a fixed term deposit that earns you 4% interest
- Once you pay tax on this interest you earned, if your personal income tax rate is 32.5% your after-tax (net) return is only 2.7%
That’s probably going to be less than the interest you’re paying on your home mortgage. If it is, perhaps your money will work harder for you in your offset account.
Every dollar you have in your offset account 'offsets' the balance of your loan – reducing the amount of interest you pay every month
What to look for in a high-quality mortgage offset account?
Not all offset accounts are the same, so make sure you check the details.
Make sure you look for:
- a 100% full offset account (rather than a partial offset)
- no minimum balance limit or penalties for withdrawal
- an offset account that can also work with a fixed rate home loan
What's the main difference between an offset account and a redraw facility?
A redraw facility also lets you reduce the interest on your variable home loan – by making extra repayments. An offset account is a linked savings account that uses its daily balance to reduce the daily interest calculation in a linked mortgage account.
Requesting a redraw from a mortgage account might take a few days to process so it can help fight the temptation for a quick purchase.
- You'll effectively save the same amount as with an offset, but you usually don’t have immediate access to your savings
- You'll also be increasing your equity (ownership) in your home because you're paying off the principal
Good quality home loans offer both offset and redraw options so work out which one works best for your personal money style and use the one that works the hardest for you.
Frequently Asked Questions: Mastering the Offset Strategy
How is the 'Daily Offset' actually calculated?
Banks calculate interest on the Net Principal each day. If your loan balance is L and your offset balance is O, the formula used for your daily interest charge (Id) at an annual rate (r) is clinical:
This is why having your salary land in the offset account even 24 hours earlier results in an Absolute reduction in the interest you pay that month. In 2026, with variable rates sitting around 6.65%, every $10,000 in your offset saves you approximately $665 in interest annually.
Why is an Offset Account better than a high-interest savings account?
The math is a 'Black and White' comparison of After-Tax Returns. When you earn interest in a savings account, the ATO taxes that income. When you save interest via an offset, it is not taxable. To beat the 6.65% saving from an offset account in 2026 (if you are in the 32.5% tax bracket), you would need to find a savings account paying over 9.8% p.a.—which simply does not exist in the institutional market.
What is the risk of a 'Partial' Offset?
Some 'discount' lenders offer partial offsets (e.g., 50%). This means only half of your savings balance works to reduce your interest. In 2026, this is a Financial Train Wreck waiting to happen, as you are likely paying an annual fee for a feature that is only half-effective. Always ensure your account is a 100% Full Offset.
Can I use an Offset Account with a Fixed-Rate loan?
Historically, this was rare. However, in the 2026 market, many competitive lenders now offer 100% offset facilities even on Fixed-Rate products. This is a critical Sovereign feature to look for if you want the certainty of fixed repayments without losing the ability to reduce interest through your savings.
Is there a limit to how much I can offset?
Generally, you can offset up to 100% of the loan balance. If your offset account balance equals your loan balance, your interest charge becomes zero. While you still have to make your scheduled principal repayments, none of that money is siphoned away by the bank as interest. This is the ultimate goal for any homeowner seeking financial independence.
Disclaimer: Mortgage interest savings depend on individual loan structures, rates, and tax positions. In April 2026, the complexity of offset mis-linking and bank fee structures makes professional advice a baseline requirement. For a strategic audit of your current home loan efficiency, we recommend a confidential consultation.
Call us today on 1300 137 403 or email us here for a no-obligation private chat about your situation.
Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses. He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn. Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.
