How Does an Offset Account Work? A Plain-English Guide for Australian Borrowers

By Andrew Paterson

An offset account is one of the simplest ways to cut the interest on a home loan while keeping your savings within reach.

Set up well, it can take years off your loan. Set up poorly, the fees can outweigh the saving, or the account may never be linked at all.

Here is how it works, what it can save and what to check.

General information only. This is not financial, credit or tax advice and does not consider your objectives, situation or needs.

What an offset account is

An offset account is a transaction or savings account linked to your home loan. The lender subtracts its balance from your loan balance before it calculates interest each day.

You keep full access to the money through your debit card, transfers and direct debits.

Here is the simple version:

• Loan balance: $520,000
• Offset balance: $30,000
• Interest is charged on: $490,000

Your savings never get locked into the loan, yet they still reduce the amount you pay interest on.

Offsets are now mainstream. ASIC reports Australians held $349.1 billion in offset accounts in March 2026, up 28% in two years. We covered the trend in offset accounts surging as homeowners race to beat higher rates.

Offsets are mostly a variable-rate feature. Fixed loans make up only a small share of new lending, so most new borrowers can at least consider one.

How the interest saving adds up

Most lenders calculate interest daily and charge it monthly. Every dollar in your offset lowers the balance interest is worked out on, for each day it stays there.

That is why many people have their pay land in the offset and spend from it. It sits alongside other ways to pay off your mortgage faster without changing your repayments.

A worked example

Take a $520,000 loan over 30 years with $30,000 in the offset. We have assumed a variable rate of 6.90% p.a., close to Finder’s average variable rate in September 2026.

Detail	Figure
Loan balance	$520,000
Offset balance	$30,000
Interest charged on	$490,000
Rough annual interest saved	~$2,070
Monthly saving	~$172
Less an example package fee	-$395
Net benefit (year one)	~$1,675

Even after a $395 annual package fee, you come out around $1,675 ahead in the first year.

The bigger gain comes over time. If your repayments stay the same, more of each one goes to principal, so the loan shrinks faster.

Keep that $30,000 in the offset for the life of the loan and you would finish about four years early, saving roughly $170,000 in interest.

These figures are illustrative only and assume the rate and offset balance never change. Your actual saving depends on your lender’s method, rate, balance, fees and loan terms.

Full, partial and capped offsets

Offsets differ from loan to loan, and this catches many people out.

• 100% (full) offset: every dollar in the account counts against the loan. This is the most common version on variable loans.
• Partial offset: only a set percentage of your balance counts against the loan.
• Capped offset: only balances up to a set dollar limit count. Some fixed-rate loans work this way.

Many fixed-rate loans offer no offset at all. If a full offset matters to you, weigh that up with the other trade-offs in should you fix your home loan rate.

When a loan is described as having an offset, ask which type it is.

Offset, redraw or extra repayments?

These three often get lumped together, yet they behave differently.

Feature	Offset	Redraw / extra repayments
Reduces interest	Yes	Yes
Access to funds	Full, like a bank account	Lender can limit or freeze redraw
Tax position if you rent the home out later	Loan purpose stays intact	Redraw for personal use can reduce deductibility

Access is the first difference. Lenders can change redraw terms, while money in an offset stays in your own account.

If paying the loan off sooner is your main goal, compare this with the extra-repayment approach in our guide to clearing your mortgage by retirement.

The redraw tax trap for future investors

The ATO looks at how borrowed money is used to decide whether the interest is deductible.

A redraw counts as new borrowing. If you redraw for something personal, such as a car or holiday, the interest on that portion generally is not deductible.

Taking money out of an offset does not touch the loan, so the loan’s original purpose stays the same.

Picture someone who lives in their home, then moves out and rents it. If their savings sat in an offset, they can use them for the next home without changing the old loan.

If they had paid the savings into the loan and redrawn them for the new home, part of the interest may no longer be deductible.

Tax outcomes depend on your circumstances. Speak to a registered tax agent before redrawing on any loan that is, or may become, an investment.

Is an offset account worth the cost?

Offsets often come with a fee. That might be an annual package fee, a monthly feature fee or a slightly higher rate than a basic loan.

For example, CommBank charges a $395 annual Wealth Package fee. It also charges a $10 monthly Offset Feature fee on its Simple and Digi home loans.

At a 6.90% rate, you need an average offset balance of about $5,700 to cover a $395 annual fee. At 6%, it is closer to $6,600.

A small balance today does not make an offset pointless. It can still be worth considering if:

• You are building savings and expect the balance to grow.
• Your income is irregular, such as bonuses, commission or self-employment, and you want a buffer.
• You are saving for a big expense and want that cash reducing interest in the meantime.
• You may rent the property out later and want to keep the loan’s purpose clean.

What matters is how your balance is likely to change over time. That is worth working through before you choose a loan.

What ASIC found about offset failures

An offset only works if it is linked to your loan. ASIC found that this does not always happen.

In July 2026, ASIC released Report 837 after reviewing eight banks. They were AMP, ANZ, CommBank, Great Southern Bank, HSBC, ING, Macquarie and Westpac.

Key findings included:

• Banks paid more than $55 million in compensation for offset failures between September 2023 and August 2025.
• In 55% of failures, the offset was opened but never linked to the loan.
• Another 22% involved offsets that were never opened.
• Manual staff errors caused 86% of reported failures.

We looked at the details in our coverage of the ASIC offset investigation.

How to check your offset is working

1. Pull up your latest home loan statement.
2. Check the interest charged reflects your loan balance minus your offset balance.
3. Confirm the offset account is listed as linked to your loan.
4. If anything looks wrong, call your lender and ask them to confirm the link in writing.

If the interest does not reflect your offset balance, raise it with the lender straight away.

Getting more from your offset

• Pay in, spend out: have your pay go into the offset and run everyday spending from it, so the balance works for longer.
• Multiple offsets: some lenders let you link more than one. CommBank allows up to 99 Everyday Offset accounts on its Standard Variable Rate loan.
• Budget buckets: separate accounts for the emergency fund, holidays and bills can make budgeting easier while every dollar still counts.

Check how your lender treats multiple accounts, as the number allowed and any fees vary.

Where rates sit right now

The RBA cash rate is 4.35%, and the next decision is due on 29 September 2026. The cash rate has risen over 2026, which makes each dollar in an offset save more than it did.

Finder puts the average variable rate at 6.90% in September 2026, with some loans starting from around 5.69%. You can compare where your rate sits in our roundup of competitive variable rates.

Rates and fees change often. Confirm current figures with the lender before relying on them.

Questions to ask before choosing an offset

• What balance can you realistically keep in the offset, on average, across the year?
• Does the interest saved beat the fee and any rate difference?
• Might this property become an investment later?
• Are you on a variable loan, or is fixing part of your plan?

We work through these questions when structuring or refinancing a loan. If you would like your own numbers run, get in touch for a chat.

Aussiewide Financial Services. General information only, not credit or tax advice. Brokers act under the Best Interests Duty.

Frequently asked questions

Do all home loans have offset accounts?

No. Many basic variable loans and most fixed-rate loans do not include a full offset. Check the product details or ask your broker which type, if any, a loan includes.

Is the money in my offset account taxed?

An offset earns no interest, so there is no interest income to tax. The saving shows up as lower loan interest instead. Check your own position with a registered tax agent.

What happens to my offset if I sell the property?

Once the loan is repaid at settlement, the account is no longer linked to anything and the balance is simply yours. If you are buying again, you can ask whether it can be linked to the new loan.

Can I use an offset with a fixed-rate loan?

Some lenders offer a partial or capped offset on fixed loans, and many offer none. Another option is to split the loan, with an offset linked to the variable portion.

Is an offset account better than a redraw facility?

It depends on how you use the money. An offset keeps savings in your own account and keeps the loan’s purpose intact, which matters if you might rent the property out later.

Redraw can suit people who want to avoid dipping into savings and rarely need the funds. Some loans without offsets also carry lower fees.