An offset account is a transaction account linked to a home loan. Its balance is subtracted from the loan balance before daily interest is calculated, so money sitting in it reduces interest charged rather than earning interest paid. It stays fully available, which is the main difference from redraw.
An offset account is one of the more useful structures in Australian lending and one of the more misunderstood. The confusion is mostly about what it does with your money: it does not earn you anything, and that is the point. This guide explains the mechanics and the conditions that determine whether the structure earns its cost. It contains no rates and no product recommendations. For published lending averages, see the home-loan rate page.
What it actually does
An offset account is an ordinary transaction account attached to a home loan. Each day, the lender calculates interest on the loan balance minus the offset balance rather than on the loan balance alone.
The money stays yours. It sits in a normal account, reachable by card and transfer, and it is not paid into the loan. What it does is reduce the balance interest is charged on, for every day it sits there.
Because interest on most Australian home loans is calculated daily and charged monthly, the timing matters as much as the amount. Money that passes through the account for ten days reduces interest for ten days. This is why salary is commonly paid into an offset account: it is doing something useful during the weeks before it is spent.
Offset compared with redraw
These are frequently treated as the same feature and they are not.
| Offset account | Redraw | |
|---|---|---|
| Where the money sits | A separate transaction account you hold | Inside the loan, as extra repayments |
| Access | Ordinary banking access | A request to the lender, sometimes with limits or delays |
| Lender discretion | The balance is yours | Availability and terms can be varied by the lender |
| Effect on interest | Reduces the balance interest is calculated on | Reduces the loan balance itself |
| Tax treatment | Neither earns assessable interest | Neither earns assessable interest |
The practical distinction is control. Extra money paid into a loan and later redrawn depends on the lender continuing to permit redraw on the terms you expect. Money in an offset account is a bank balance you hold.
There is a second distinction that matters if a property might later be rented out: paying down a loan and redrawing can change the purpose of the borrowed funds for tax purposes, in a way that holding the money in an offset account does not. That is a question for a registered tax agent rather than something to decide from a general article.
Full offset and partial offset
A full offset counts every dollar in the account against the loan balance. A partial offset counts only a proportion.
Product documents do not always make this prominent, and the difference is large. An account offsetting a fraction of its balance delivers a fraction of the benefit while often carrying the same conditions. When reading any offset product, confirm which it is before anything else.
The fee question
Offset accounts are commonly attached to a package or to a loan variant that carries either an annual fee or a slightly higher interest rate than the equivalent loan without one. That is the real decision: the structure is worth having when the interest it saves exceeds what it costs to have.
The arithmetic depends on four things:
- The loan rate, because the saving is the offset balance multiplied by the rate.
- The average balance you actually keep in the account, not the balance on a good month.
- The fee, annual or built into the rate.
- How long the arrangement runs.
None of that requires a forecast. It requires your own numbers, and the mortgage repayment calculator can show what a change in the effective balance does to a repayment schedule.
Why the tax point comes up so often
Interest saved on a loan is not income, so it is not taxed. Interest earned in a savings account is assessable income and is taxed at your marginal rate. This is why the two are not directly comparable on their headline rates, and why comparisons that ignore it are misleading.
Applying that to a particular situation involves your marginal rate, the loan rate, the deposit rate and any deductibility questions attaching to the property. That is advice, and it needs someone licensed to give it. The Australian Taxation Office publishes general guidance, and a registered tax agent can address a specific case. Tradergy does not give financial or tax advice and does not recommend products.
Where to look next
- Home-loan rates - published averages from the Reserve Bank series.
- Mortgage repayment calculator - what a change in balance does to a schedule.
- Offset account and comparison rate - the short definitions.
- How to find a mortgage broker - the service-side guide, with no product picks.
General information about how offset accounts work. Not financial or tax advice, not a recommendation of any product or lender, and not a suggestion to borrow. Tradergy keeps no account and collects no personal data. Reviewed by the Tradergy editorial team, September 2026.
Common questions
What is the difference between an offset account and redraw?
An offset account is a separate transaction account whose balance reduces the interest calculation. Redraw is extra money paid into the loan itself that you ask to take back. Offset funds are yours and available like any bank balance; redraw is at the lender's discretion and the terms can be changed.
Is an offset account better than a savings account?
They do different things. Interest saved on a loan is not taxed, while interest earned in a savings account is assessable income. Whether an offset arrangement suits a situation depends on the loan rate, the deposit rate, the fee and the tax position, which is a question for a licensed adviser.
What is a partial offset account?
An account where only a proportion of the balance counts against the loan, rather than the full amount. Full offset counts every dollar. The distinction is easy to miss in product documents and it changes the arithmetic substantially.
Can I have more than one offset account?
Some lenders allow several offset accounts against a single loan, and some allow one only. Where multiple accounts are allowed, their balances usually combine for the offset calculation.