What is an offset account and how does it work

An offset account is a bank account linked to your home loan that helps reduce the interest you pay. The money you keep in it offsets your loan balance, so you’re charged interest only on the difference.

An offset account is an everyday transaction account linked to your home loan. You can deposit your pay, pay bills, and use a debit card just like normal.

The main advantage is interest reduction: every dollar in your offset reduces the home loan balance assessed for interest.

The Math at a glance:

• Loan Balance: $500,000
• Offset Balance: $50,000
• Balance Charged Interest: $450,000

Your required monthly repayment remains unchanged. However, because interest charges are lower, a larger portion of each repayment reduces your loan balance, helping you pay off your home faster.

While offset accounts offer significant benefits, they aren't guaranteed money-savers for everyone:

An offset account works best when you can keep a steady balance in it. If you usually have little money sitting in the account, a lower-rate home loan without an offset could offer better value.

The more money you keep in your offset account, the less of your home loan is subject to interest.

Some borrowers have their salary paid directly into their offset and use the account for everyday spending. Even if the balance changes throughout the month, the money sitting in the account can reduce the interest charged while it is there.

For example, assume a $700,000 home loan at 6% p.a. If the offset balance remained constant throughout the year:

Source: Bheja.ai. Hypothetical example based on a $700,000 loan and an assumed interest rate of 6% p.a. Actual savings depend on your loan balance, interest rate and offset balance over time.

The table shows the maximum potential interest saving if the offset balance stays unchanged for the entire year. In practice, your balance will usually move as your salary comes in and you make everyday payments.

For example, keeping an average of $50,000 in the offset over a year could reduce interest by roughly $3,000 at a 6% interest rate.

An offset account and a savings account work differently.

Money in a savings account earns interest. Money in an offset account doesn't earn interest, but it can reduce the interest charged on your home loan.

At a 6% mortgage rate, keeping $50,000 in an offset for a full year could save around $3,000 in mortgage interest. A savings account would need to provide an equivalent after-tax return to deliver the same benefit.

Interest earned on a savings account is generally taxable. The interest you avoid paying through an offset isn't income, so it isn't taxed as interest.

The comparison therefore depends on the mortgage rate, the savings rate available to you, your tax rate, any fees attached to the offset loan and how consistently you maintain the balance.

An offset loan can have a higher interest rate than a basic home loan from the same lender. The difference is often around 0.10 to 0.30 percentage points, although this varies between lenders and products.

That higher rate applies to your loan balance. Your offset balance reduces the amount of the loan on which interest is calculated.

For example, if you have a $600,000 loan and $100,000 in your offset, interest is generally calculated on $500,000.

But you also need to consider the extra cost of the offset loan. If the offset rate is 0.15 percentage points higher than the equivalent basic loan, you would pay about $900 more in interest each year on a $600,000 loan.

Your break-even balance is the amount you need to keep in your offset for the interest saving to cover that extra cost.

Break-even balance = (Loan balance × rate premium) ÷ interest rate

In this example, at an interest rate of 6.09%, you would need roughly $14,800 in your offset to save about $900 in interest.

For example, on a $600,000 loan at 6.09% p.a.:

*Illustrative calculation based on a $600,000 loan and a 6.09% p.a. rate. It doesn't include package or other fees, which can change the break-even point.

The important point is that the more money you consistently keep in your offset, the more interest you can save. If your offset balance is usually low, a basic loan with a lower rate may provide better value. If you regularly keep savings, your salary or an emergency fund in the account, the interest saving can outweigh the higher cost of the offset loan.

An offset account is one way to reduce the interest you pay, but it isn't the only option.

• Offset account: Your savings remain in a separate account while reducing the loan balance used to calculate interest.
• Redraw facility: Extra repayments reduce your loan balance, with the option to access some of those additional repayments later, subject to your lender's rules.
• Basic home loan: Usually offers a lower interest rate but fewer features.

The right option depends on the interest rate, fees, how much money you expect to keep available and how often you need access to it.

Potential benefits of a mortgage offset account:

Potential drawbacks of a mortgage offset account

• Compare Home Loans with Offset account

In Report 837, “Offsets, out of mind” (July 2026), ASIC reviewed how eight major banks, covering more than 70% of Australia’s home loan market, set up, link and manage offset accounts. The findings highlight how offset account errors can go undetected, with some issues only identified after customers raised concerns.

Key findings:

Source: ASIC Report 837, July 2026

ASIC noted that many failures went undetected by the banks themselves. Customers only found out after raising a complaint, since a broken offset doesn't change your repayment amount or trigger any obvious warning.

Having an offset account doesn't automatically mean you're getting the full benefit. A few simple checks can help you make sure it is doing what you expect.

Make sure the offset account is actually linked to your home loan. If you have more than one loan or multiple accounts, check that the money is being offset against the loan you intended.

Not all offset accounts work in exactly the same way. Check whether your account provides a 100% offset and whether the full balance is used to reduce the amount of your loan on which interest is calculated.

An offset may come with a higher interest rate, package fee or other charges. Compare these costs with the interest you're saving to make sure the feature is delivering value for you.

Your offset balance can change throughout the month, so the amount you save will change too. If your balance is consistently low, you may want to check whether you're getting enough benefit from the offset feature.

You don't have to work this out from your statements.

Bheja's Offset Tracker checks your home loan and offset account to see whether they're correctly linked and whether your offset is working as expected.

• Is your offset account linked to your mortgage?
  Check now. It's free.