Putting spare cash against your mortgage is one of the best low-risk returns going, because you save interest at your loan rate and pay no tax on the saving. The two ways to do it are an offset account or extra repayments, and nearly every comparison you will read says they save "roughly" the same interest.
They do not save roughly the same interest. Held at the same balance, they save exactly the same interest, down to the cent. That matters, because it means the entire decision rests on three things that have nothing to do with the arithmetic: whether you can get the money back, what the loan is for and what the lender charges you.
How each one works
Offset account. A transaction or savings account linked to your loan. Whatever sits in it is offset against your loan balance, so interest is charged only on the difference. Put $20,000 in the offset on a $500,000 loan and you are charged interest as if you owed $480,000 — but the $20,000 is still yours, still in an account, still spendable today.
Extra repayments. You pay more than the minimum straight onto the loan, which reduces the principal. That cuts the interest charged from then on and shortens the term. To get the money back later you use redraw, which is a feature of your loan contract rather than an account of your own.
The loan balance is the difference that matters. An offset never touches it. An extra repayment permanently reduces it.
The interest outcome is identical, not similar
Take a $500,000 loan at 6% over 30 years, repaid monthly. The minimum repayment is $2,997.75 and the loan costs $579,190.95 in interest if you do nothing.
Now put $30,000 against it, and keep the repayment the same either way:
- In the offset, left alone for the life of the loan: you pay $450,872.60 in interest, saving $128,318.34, and the loan clears in 318 months — 42 months early.
- Paid straight off the principal on day one: you pay $450,872.60 in interest, saving $128,318.34, and the loan clears in 308 months — 52 months early.
The interest figures are not close. They are the same number. That is not a coincidence or a rounding artefact: in both cases the lender charges you interest on an amount $30,000 smaller than your notional balance every single month, and your repayment is unchanged. The two balance paths sit exactly $30,000 apart the whole way down, so the interest charged each month is exactly equal.
The ten-month difference in the payoff date reconciles just as neatly. Ten more repayments of $2,997.75 is $29,977.53 — which is, near enough, the $30,000 that was sitting in your offset the entire time and is now paying off the last of the loan. The offset borrower finishes later and finishes holding the cash. The lump-sum borrower finishes sooner and finishes holding nothing. Total money out the door is the same to the dollar.
Test it on your own loan
Offset or straight off the principal?
In the offset
$128,318
interest saved, loan clear in 318 months
Off the principal
$128,318
interest saved, loan clear in 308 months
The same saving, to the cent. The offset loan runs 10 months longer because the balance never fell — and at the end you still have the $30,000.
Monthly repayments, offset balance held constant. Uses the same engine as the Mortgage Calculator.
You can also compare several strategies at once in the Mortgage Strategy Optimiser, or model a changing offset balance with the Offset Account Calculator.
What an offset is actually worth, by balance
The same loan, at a range of offset balances held for the full term:
| Offset balance | Interest saved | Loan cleared |
|---|---|---|
| $5,000 | $24,453 | 8 months early |
| $10,000 | $47,532 | 15 months early |
| $20,000 | $90,035 | 30 months early |
| $30,000 | $128,318 | 42 months early |
| $50,000 | $194,606 | 64 months early |
| $100,000 | $317,968 | 106 months early |
Note that the returns diminish. A $100,000 offset saves 2.5 times what a $30,000 offset saves, not 3.3 times, because the bigger offset clears the loan so much sooner that there is less loan left for it to work on. Doubling the balance does not double the benefit.
The catch that undoes the identity
Everything above assumes the money stays put. Interest is charged on your balance less the offset balance for that period, so the moment you draw the offset down, the saving drops with it for as long as the money is out.
An offset you routinely run down to $8,000 before payday is, for those weeks, an $8,000 offset. Over a year, an offset that averages $12,000 saves you roughly what a $12,000 offset saves, no matter what the peak was. Extra repayments cannot slip like this, because the money is gone and the reduced balance is permanent.
So the honest way to read the table is as a ceiling. Extra repayments hit that ceiling automatically. An offset hits it only if you leave the balance alone, which is a behavioural question rather than a financial one.
For investors, redraw can cost you the deduction
This is the part that turns a preference into a clear answer, and it is the most expensive mistake in this whole area.
On an investment loan, interest is deductible because of what the borrowed money was used for. When you make an extra repayment and later redraw it, the redraw is treated as a new borrowing — and its deductibility depends on what you spend the redrawn money on, not on what the original loan bought. Redraw $40,000 from your investment loan to renovate your own kitchen and the interest on that $40,000 is not deductible. The ATO's ruling on redraw and line-of-credit facilities (TR 2000/2) sets out this treatment.
The reason it is worse than a one-off haircut is what happens next. Your loan is now a mixed-purpose loan: part investment, part private. Every future repayment has to be apportioned across both parts in proportion, and you cannot direct repayments at the private portion to clear it first. The contamination stays with the loan until the whole thing is repaid, and it makes your interest deduction a calculation you have to keep doing every year.
An offset avoids all of it. The loan balance never changes, so there is no repayment to redraw, no new borrowing and nothing to apportion. Money moves in and out of an ordinary bank account and the loan's purpose is untouched. Where a loan is or may become an investment loan, that is a structural advantage rather than a matter of taste — and it sits alongside the other mechanics in negative gearing explained.
If you have both an owner-occupier loan and an investment loan, the order follows from the same logic: offset the non-deductible debt first. A dollar of interest you cannot deduct costs you more than a dollar of interest you can.
Offset versus just leaving it in savings
An offset saves you interest. A savings account earns you interest, and earned interest is taxable income. That gap is much larger than people expect.
On $30,000 against a 6% loan, the offset saves $1,800 in the first year, and none of it is taxable. To match that, a savings account has to pay you $1,800 after tax:
| Marginal rate (with Medicare levy) | Savings rate needed to match a 6% offset |
|---|---|
| 17% | 7.23% |
| 32% | 8.82% |
| 39% | 9.84% |
| 47% | 11.32% |
At a 39% marginal rate you would need a savings account paying 9.84% to beat a 6% offset. Nothing pays that. This is why an emergency fund parked in an offset is doing two jobs at once, and why chasing a headline savings rate with money that could be offsetting a mortgage almost never wins on the numbers.
One caveat on the bottom row. Those are bracket rates plus the Medicare levy, and at lower incomes they understate what you actually face, because the low income tax offset and the Medicare levy shade-in both withdraw as you earn more. If you are near the bottom of the scale your real marginal rate is higher than your bracket suggests, so the savings rate you would need to beat an offset is higher again — the case for the offset gets stronger, not weaker.
What the offset costs you
Offsets are rarely free. They usually come attached to a packaged loan with an annual fee, commonly a few hundred dollars, and occasionally as a per-account fee.
There is a clean break-even for it: annual fee ÷ interest rate. On a $395 package fee and a 6% loan, that is $6,583. Keep less than that in the offset on average and the fee costs more than the offset saves. Keep more and you are ahead.
Two qualifications. Package fees often buy a rate discount as well, so only the part of the fee you are paying for the offset belongs in that sum — if the discount alone justifies the package, the offset is free. And some products are partial offsets, where only a percentage of the balance counts. A 50% offset on $30,000 behaves like a full offset on $15,000, and the break-even balance doubles.
Where extra repayments genuinely win
Extra repayments are not merely the poorer cousin. There are three situations where they are the better instrument.
Lowering your LVR. Money in an offset does not reduce your loan balance, so it does not improve your loan-to-value ratio. Extra repayments do. If you are trying to get under 80% to escape lenders mortgage insurance, refinance onto a better rate tier or release a guarantor, only the repayment moves that number. Check the numbers with the LMI Calculator and the Refinance Break-Even Calculator.
Fixed-rate loans. Most fixed loans cap extra repayments — a common limit is a few thousand dollars a year — and charge break costs beyond it. Many fixed loans do not offer an offset at all, or offer it only on a split. If your loan is fixed, check what your contract actually permits before assuming either option is open.
Discipline, honestly assessed. The identity above only holds for an offset you do not spend. If you know you will spend it, extra repayments deliver the arithmetic that an offset only promises.
Redraw is a feature, not a right
One asymmetry worth naming. Money in an offset is money in your account. Money you have repaid is the lender's, and redraw is a contractual facility with its own terms: minimum and maximum amounts, processing times and conditions the lender can vary. It is generally reliable and generally quick, but it is not the same as having the cash, and it is worth reading what your loan says about it before you rely on it as your emergency fund.
Which should you choose?
- Owner-occupier who wants flexibility: offset. Identical interest saving, money stays yours.
- Owner-occupier who will spend the balance: extra repayments, because they actually deliver the saving an offset only makes available.
- Owner-occupier with a small balance and a package fee: run the break-even. Under a few thousand dollars, the fee can swallow the benefit.
- Investor, or anyone whose home might become a rental: offset, to keep the loan's purpose and its deductibility clean.
- Anyone chasing a lower LVR: extra repayments, because that is the only one of the two that moves the balance.
The Mortgage Calculator will show you both effects on your own loan side by side, and mortgage repayments in Australia covers the repayment mechanics behind them.
Frequently Asked Questions
Yes — exactly the same, provided the offset balance stays put. On a $500,000 loan at 6%, $30,000 either way saves $128,318.34 in interest. The difference is that the offset money remains yours, and the loan takes about ten months longer to clear because your balance never actually fell.
No. Money in an offset reduces the interest you are charged rather than earning interest, so there is no income to tax. At a 39% marginal rate, a 6% offset is worth the same as a savings account paying 9.84% before tax.
Because redrawing an extra repayment counts as a new borrowing, and the interest on it is deductible only if you spend it on something income-producing. Redraw for private purposes and the loan becomes a mixed-purpose loan whose repayments must be apportioned between deductible and non-deductible parts. An offset leaves the loan balance and its purpose untouched.
Yes, and many loans allow it. For most owner-occupiers, putting spare cash in the offset gives the identical interest saving with more flexibility, so extra repayments only add something if you specifically want the balance reduced.
No. A $100,000 offset on that same loan saves $317,968 against a $30,000 offset's $128,318 — 2.5 times the saving for 3.3 times the money — because the larger offset clears the loan sooner and leaves less loan for itself to work on.
Divide the annual fee by your interest rate. A $395 fee on a 6% loan needs an average offset balance above $6,583 to pay for itself, and less if the package also buys you a rate discount you would want anyway.