Many Australian variable-rate home loans let you reduce interest in two ways: by making extra repayments into the loan (often with a redraw facility), or by keeping savings in a linked offset account. Both can cut years off a loan. The difference lies less in the maths and more in flexibility, fees, and how the money is treated if your plans change.
In this article you will learn:
- how interest is calculated daily on most Australian home loans and how an offset account fits into that
- why a constant offset balance saves exactly the same interest as having borrowed that much less
- how redraw differs from an offset account
- a worked example on a $600,000 loan
- the questions to ask before choosing, including general tax points to raise with a professional
How interest is calculated on most home loans
Australian lenders commonly calculate interest daily and charge it monthly. The daily interest is roughly:
Daily interest = balance used for interest × annual rate ÷ 365
At the end of each month, the daily amounts are added up and charged to the loan. Your repayment then covers that interest plus some principal. Check your loan contract for the exact method, since lenders can differ in details such as the day count and when interest is debited.
This daily calculation is what makes offset accounts useful: every day money sits in the offset account, it reduces the balance that interest is calculated on.
How an offset account works
An offset account is a transaction or savings account linked to your home loan. Instead of earning interest, the balance in the offset account is subtracted from your loan balance when the lender calculates interest.
Example of a single day (illustrative):
- Loan balance: $600,000
- Offset balance: $30,000
- Rate: 6.00% per year
- Interest without offset: $600,000 × 0.06 ÷ 365 = $98.63
- Interest with offset: $570,000 × 0.06 ÷ 365 = $93.70
- Saving for that day: about $4.93
Over a 31-day month that is about $152.88, and over a full year roughly $30,000 × 6% = $1,800, assuming the offset balance stays at $30,000.
Importantly, your required repayment usually stays the same. Because less of the repayment goes to interest, more goes to principal, so the loan balance falls faster and the loan finishes earlier.
A 100% offset reduces the interest calculation by the full offset balance. Some products offer partial offset, where only a percentage of the balance counts. This article assumes a full offset.
Why a constant offset balance equals borrowing less
Consider two borrowers:
- Borrower A takes a $600,000 loan and keeps $30,000 in a full offset account for the whole term, never touching it.
- Borrower B takes a $600,000 loan and immediately pays $30,000 off it as an extra repayment, leaving $570,000 owing.
Both keep making the repayment calculated for the original $600,000 loan. In every period, both are charged interest on the same amount: Borrower A on $600,000 minus $30,000, Borrower B on $570,000. Their interest charges are identical, month after month. The only difference is where the $30,000 sits:
- For Borrower A, it is still in their own account, available the same day if needed.
- For Borrower B, it is inside the loan. Getting it back depends on the redraw terms, which the lender sets.
When Borrower B's balance reaches zero, Borrower A's loan balance is exactly $30,000, which is the amount in the offset account. A can use the offset funds to clear the loan on the same day and be in the same position.
Worked example: $600,000 over 30 years at 6%
This is an illustrative example. It uses monthly compounding (interest calculated at 6% ÷ 12 on the relevant balance each month) to keep the arithmetic transparent. Daily calculations give very similar, but not identical, results.
Inputs
- Loan: $600,000
- Rate: 6.00% per year, variable, assumed constant
- Term: 30 years (360 monthly repayments)
- Monthly repayment (principal and interest): $3,597.30
Scenario comparison
| Scenario | Total interest (approx.) | Interest saved | Time to clear loan |
|---|---|---|---|
| No offset, no extra repayments | $695,031 | n/a | 30 years |
| $30,000 kept in offset for the full term | $563,436 | $131,595 | 26 years 4 months, if the offset funds are used to clear the final $30,000 |
| $30,000 extra repayment on day one | $563,436 | $131,595 | 26 years 4 months |
The interest saving is identical, as expected. If Borrower A does not use the offset funds to clear the loan at that point and keeps paying normally, the loan runs about another eight months, but with no further interest charged because the offset balance covers the whole remaining balance.
The saving is large relative to the $30,000 because that money avoids 6% interest, effectively compounding, for most of the loan term.
Free toolMortgage Offset CalculatorSee how much interest and time a 100% offset account saves on your Australian home loan, modelled day by day.Real offset balances move
Very few people keep a constant offset balance. Salary is deposited, bills are paid, and the balance rises and falls. What matters is the daily balance. A few practical points follow from that:
- Having your income paid into the offset account means it reduces interest for the days before you spend it.
- Some people pay everyday expenses with a credit card (paid in full by the due date each month) so that cash stays in the offset account longer. This only works if the card is always cleared in full; carrying a card balance costs far more than the offset saves.
- A large lump sum parked in the offset for a few months (for example, money set aside for a renovation or a tax bill) still reduces interest for those months.
Redraw vs offset
A redraw facility lets you take back extra repayments you have made into the loan. It can look similar to an offset account, but there are important differences.
| Feature | Offset account | Redraw facility |
|---|---|---|
| Where the money sits | In a separate account in your name | Inside the loan, reducing the balance |
| Interest saving | Same as an equal extra repayment, while the money stays there | Same, while the money stays in the loan |
| Access | Usually like an everyday account, with card and transfers | Depends on the lender: may require online transfer, minimum amounts, or fees |
| Lender control | Your deposit | The lender may be able to change redraw terms under your contract; check your loan terms |
| Common cost | Often available on packaged or higher-feature loans that may carry annual fees or a slightly different rate | Often available on basic variable loans |
| Fixed-rate loans | Often limited or unavailable | Extra repayments and redraw are often capped |
Because the interest saving is the same, the decision usually comes down to how much you value easy access and separation, against any extra fees or rate difference on a loan with an offset.
Free toolHome Loan Extra Repayment CalculatorSee how extra fortnightly, weekly or monthly repayments and a lump sum cut interest and time off an Australian home loan.Tax considerations (general only)
Tax is where offset and redraw can differ in outcome, especially if a property may later become an investment. The following are general points to raise with a registered tax agent or financial adviser, not advice for your situation.
- Offset funds are not interest income. Money in an offset account reduces the interest you are charged rather than earning interest paid to you, so in general there is no interest income to declare on it, unlike a standard savings account. Confirm how this applies to you.
- Deductibility can depend on how borrowed money is used. For investment loans, whether interest is deductible generally depends on what the borrowed funds are used for. Paying money into a loan and then redrawing it for a different purpose can change how that part of the loan is treated. Keeping savings in an offset instead leaves the loan balance unchanged.
- Plans to rent out your home later. People who expect to turn their home into an investment property sometimes prefer an offset so the loan balance stays higher. Whether that suits you depends on your circumstances, so get professional advice before choosing a structure.
Rules and interpretations can change. The Australian Taxation Office publishes guidance on rental property interest, and a professional can apply it to your facts.
Checklist: choosing between offset and extra repayments
- Compare the interest rate and annual fees of loans with and without an offset.
- Estimate the average balance you would realistically keep in an offset account.
- Check whether the offset is 100% or partial, and whether it applies to fixed or split loans.
- Read the redraw terms: minimum amounts, fees, and whether the lender can change or restrict redraw.
- Consider whether you might ever rent out the property, and ask a tax professional how each option would affect you.
- Decide how much instant access you need for emergencies.
- Model both options with the same repayment and rate so the comparison is fair.
When extra repayments might suit you better
- You are unlikely to need the money again and want the discipline of it being inside the loan.
- The loan with an offset costs more in fees or rate than you would save.
- Your savings balance is small, so the benefit of an offset over redraw is minor.
When an offset might suit you better
- You want the interest saving but also want the money available at short notice.
- You hold a meaningful buffer of cash, such as an emergency fund or money set aside for a planned expense.
- You think the property may become an investment in future, and a tax professional has confirmed an offset is appropriate for you.
Summary
- Most Australian home loans calculate interest daily; an offset account reduces the balance interest is charged on, day by day.
- A constant offset balance saves exactly the same interest as paying that amount off the loan, while keeping the money in an account you control.
- In our illustrative $600,000 example at 6%, holding $30,000 in offset or repaying $30,000 upfront both save about $131,595 in interest and can clear the loan about 3 years 8 months early.
- Redraw offers similar savings, but access depends on the lender's terms.
- Tax outcomes can differ, especially for investment properties; speak with a registered tax agent before deciding.
Try your own numbers in the mortgage offset calculator or compare extra repayments with the extra repayment calculator. This article is general information, not financial or tax advice. See our financial disclaimer.