Putting spare cash against your mortgage is one of the best low-risk returns going, because you save interest at your loan rate, tax-free. The two main ways to do it — an offset account or extra repayments — save almost the same interest, but they behave very differently when you need the money back. Here is how to choose.
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 you are only charged interest on the difference. Put $20,000 in the offset on a $500,000 loan and you pay interest as if you owed $480,000 — but the $20,000 stays yours, fully accessible.
Extra repayments. You pay more than the minimum straight onto the loan, reducing the principal. That cuts the interest and shortens the term. To get the money back later you use redraw, which depends on your lender allowing it.
The interest saving is similar either way. Compare both on your loan with the Offset Account Calculator and the Mortgage Strategy Optimiser.
A worked example
On a $500,000 loan at 6% over 30 years, parking $30,000 either in an offset or as extra repayments saves roughly the same — about $1,800 a year in interest while the money stays there, and years off the loan if you leave it.
The difference is access. The offset money is in your account, ready to use today. The extra-repayment money is in the loan and only comes back through redraw.
Where they differ
- Access. Offset wins. Funds are available instantly with no redraw request or lender approval.
- Discipline. Extra repayments can be harder to dip into, which some people prefer.
- Fees. Some loans charge for an offset or only offer it on a package with an annual fee. Redraw can have limits or per-transaction fees. Check both.
- Tax, for investors. This is the big one. On an investment loan, redrawing extra repayments for a non-investment purpose can reduce how much of your interest stays tax-deductible. An offset does not touch the loan balance, so it keeps your deductible debt intact. For investment properties, an offset is usually the cleaner choice — and it pairs with strategies like negative gearing.
Which should you choose?
- Owner-occupier who wants flexibility: offset. Same interest saving, money stays available.
- Owner-occupier who wants to avoid temptation: extra repayments can enforce discipline, but you give up easy access.
- Investor: offset, to protect the deductibility of your loan interest.
Whichever you pick, the Mortgage Calculator shows how extra money against the loan shortens your term.