Offset Account: How It Works and When It Pays

An offset account is a transaction account linked to your home loan, and every dollar in it reduces the balance you’re charged interest on. Moneysmart puts it simply: each day, the lender subtracts your offset balance from your loan balance before calculating interest. With $50,000 in the offset against a $600,000 loan, you’re charged interest on $550,000, and the money is still yours to spend tomorrow.

Your repayment doesn’t change. The interest you’re not charged comes off the principal instead, so the loan finishes earlier than its term. That’s the whole mechanism. Most of what’s interesting about offsets sits in the details around it: who can reach the money, what the package costs, and what happens at tax time if the home stops being your home.

Offset or redraw: who can get at the money

Redraw looks similar on a statement. You make extra repayments into the loan itself, the balance falls, and you can take the extra back out later. The interest saving is much the same.

The difference is whose money it is. Money in an offset is savings; money paid into redraw has repaid the loan, and whether you can get it back depends on the lender. Moneysmart says access to redraw depends on your loan terms, and lenders can set minimum redraw amounts, charge for it or limit it. An offset balance also sits in an account with your name on it, which matters if you’re a couple with one name on the loan and another on the savings.

Redraw does have one real advantage. Money that has gone into the loan is harder to spend on impulse, and a basic loan with free redraw usually carries no package fee. For a household that treats its offset as a second everyday account, that discipline can be worth more than the flexibility it gives up.

The tax difference if the home becomes a rental

This is the reason we raise offsets with almost every upgrader. Plenty of people buy their next home and keep the current one as an investment, and the loan on the old home is where the tax either works or doesn’t.

The ATO treats a redraw as a new borrowing. Taxation Ruling TR 2000/2 calls the term “redraw” a misnomer because it is in effect new borrowing, and whether its interest is deductible depends on what the redrawn money is used for. The ATO’s apportionment guideline, PCG 2026/2, puts the contrast directly: redrawn amounts relate to what was purchased with them, and a redraw facility is different from a loan offset arrangement. So if you paid your home loan down to $200,000 through redraw, then took $300,000 back out as the deposit on your next home, most of that loan now funds a private purchase, and the interest on it isn’t deductible when the old place is rented out. Had the same $300,000 sat in an offset, the loan would still be $500,000 of debt used to buy the property that’s now producing rent.

A home you already owned before 7:30 pm on 12 May 2026 keeps the old negative gearing treatment when it becomes a rental, under the 2026 tax changes, so for most upgraders the structure of the loan is the part still in their hands. This is an accountant’s question as much as ours, and we’ll say so. Our part is making sure the structure your accountant needs exists before settlement, when changing it is a matter of paperwork rather than a refinance, and our upgrading page covers how that fits with bridging and keeping the old place.

Package fees against what the offset saves

Offsets usually come on a package loan with a yearly fee. CommBank’s Wealth Package is $395 a year on its fee schedule effective September 2026, and NAB’s Choice Package is also $395, on a page correct as at 28 September 2026.

The break-even is easy to work out. Divide fee by rate. At 6.24%, the RBA’s July 2026 average for existing owner-occupier variable loans, a $395 fee needs about $6,330 sitting in the offset all year before the saving covers it. Moneysmart makes the same point from the other end: if your offset balance will always be low, for example under $10,000, the feature may not be worth paying for.

The fee isn’t the only cost, either. Package loans are sometimes priced at a discount that more than pays for the fee and sometimes not, and the only way to know is to compare the package rate with the lender’s own basic loan and with the rest of the market for a loan your size.

Our view, which some lenders’ marketing would dispute: the package loan is oversold. Plenty of borrowers pay a package fee every year for an offset that holds a few thousand dollars between pay days, when a basic variable loan with free extra repayments would cost them less, and a broker who recommends the package by default isn’t looking at the balance. The fee, the rate difference and the average balance decide it, and the average balance is the number people guess worst. We’d rather say that out loud than sell the package to a household it doesn’t suit.

A hypothetical, run through the calculator

Here’s a hypothetical, with invented numbers, run through our offset account calculator. A $600,000 loan with 25 years left at 6.24%, $50,000 in a full offset and $1,000 added each month. The repayment stays at about $3,954 a month, and the loan is repaid about six and a half years early, saving roughly $314,000 of interest over its life. With the $395 fee charged to the loan every year, the saving is still about $303,000. The fee barely registers.

Swap in a 40% partial offset on the same hypothetical and the saving falls to about $164,000. Keep only $5,000 in a full offset with nothing added and the fee wins: the calculator shows you about $6,200 behind by the end. That’s the break-even figure playing out over 25 years instead of one. Small balances and yearly fees don’t mix.

Why a split can beat a full offset

Offsets are generally a variable-rate feature. NAB’s fixed rate loans come without the 100% offset and with extra repayments capped at $20,000 during the fixed period, and Bankwest offsets at most 40% on its fixed loans. That constraint is exactly why splitting works.

An offset only needs a loan balance as big as your savings. In a hypothetical where you’ll realistically hold $30,000, a $200,000 variable split with the offset saves the same interest on that $30,000 as a $600,000 one would, and the other $400,000 can sit wherever it’s cheapest, fixed or variable, without paying for a feature it can’t use.

As a hypothetical with invented rates, $400,000 fixed at 5.89% plus $170,000 of net variable debt at 6.24% costs about $34,170 of interest in the first year, against $35,570 for the whole $570,000 net at 6.24%. The catch is flexibility. The fixed split carries break costs and repayment limits, and if your savings grow past the variable split, the extra dollars stop offsetting anything until you restructure.

Ansa looks at a borrower’s actual balances over the past year before recommending an offset, not the balance they hope to hold. She’ll tell you when the package doesn’t pay, and she’ll also tell you when we can’t answer the tax question for you, because we can’t. One practical thing anyone can do: check that the account really is linked. ASIC found banks paid over $55 million in compensation for offset accounts that weren’t reducing interest the way they should have.