Offset Account

Plain-English definition. An offset account is a regular transaction account linked to your home loan. Its balance is subtracted from the loan principal when the lender calculates daily interest, reducing your interest cost without locking the money away.

How it works in Australia. A "100% offset" works exactly as advertised: every dollar in the account offsets a dollar of loan balance for interest purposes. Offsets are typically only available on variable-rate loans (or fixed loans with limited offset capability up to a cap). They sit inside a "professional package" that costs $300–$400 in annual fees and bundles credit cards, fee-free transactions and a discounted rate. Crucially, money in an offset account is not a loan repayment — it's still your money, withdrawable any time. ASIC's Moneysmart on offsets explains the trade-offs.

Concrete example. $700,000 loan at 6.20% with $80,000 sitting in a 100% offset. Interest is calculated on $620,000, saving $4,960/year (or $413/month) of interest. Over 30 years, if you maintain that average offset balance, you'd save roughly $148,000 in interest and pay the loan off about 4 years early. Offset interest is also tax-free — unlike a savings account, where the equivalent earnings would be taxed at your marginal rate.

Common confusion. Offsets and redraw look similar but aren't equivalent. Offset funds are clearly your money in your transaction account, with no tax or deductibility issue. Redraw is technically funds repaid into the loan and re-borrowed — for investors converting a property from owner-occupier to investment, this distinction can determine whether interest is deductible.