How this calculator works

When you have spare cash, three options come up again and again: leave it in a mortgage offset account, make an extra repayment on the home loan, or invest it. They can all be reasonable. They do not do the same job.

An offset account reduces the loan balance your lender uses to calculate interest, while leaving the money accessible in a transaction account. An extra repayment reduces the principal itself. Investing the same cash might earn a return, but that return is not guaranteed and the earnings are usually taxable.

This explainer compares those mechanics, with a simple interest-saving illustration, and flags the costs a comparison often misses. It sits with the Never Lose Interest mortgage repayment calculator, compound interest explainer and refinancing a home loan guides. It is not a recommendation to choose one option, and it does not use a forecast of investment returns.

This is general information only. It is not personal advice and it does not take into account your objectives, financial situation or needs. Loan features, fees and tax treatment depend on your contract and your circumstances.

How does an offset account work?

A mortgage offset account is a transaction account linked to your home loan. The balance in the account is subtracted from the loan balance before interest is calculated. Moneysmart's example is a $750,000 loan with $50,000 in the offset account, so interest is charged on $700,000. In another official example, a $500,000 loan with $20,000 in the offset is charged interest on $480,000.

Interest on most home loans is calculated daily. Each day, the lender uses the loan balance minus the offset balance. The more you keep in the offset, and the longer it stays there, the larger the interest saving. You can usually have your salary paid in, pay bills from the account, and use a debit card, as you would with an ordinary transaction account.

The saving is the same idea as earning interest at your home loan rate, tax-free, on the money in the offset, because you are paying less interest rather than earning assessable interest. That is why people compare an offset with a savings account or an investment. It is also why the comparison depends on your actual loan rate and on the fees you pay for the offset feature.

Moneysmart notes that an offset may be worth it if you have a reasonably large loan, keep a regular savings balance, and want flexible access to the money. It may not be worth it if the offset balance is usually low, the loan has higher fees to include the feature, or the interest rate is higher than a similar loan without an offset. Some lenders charge for the feature through a higher rate, a package fee, an account fee, or a combination of those.

Check that the account is actually linked. ASIC has warned that some customers have paid more interest than they should because an offset was not linked or managed correctly. Loan repayments can stay the same, so the extra interest is easy to miss. If you refinance or switch products, the link can break, and you may need the lender to reconnect it. If the interest shown in your statements or app does not look right, ask the lender.

Moneysmart also describes a strategy of paying salary into the offset, using a credit card for everyday spending, and paying the card off in full by the due date, so more money stays in the offset for longer. That only works if the card is paid in full each month. Moneysmart noted that the average credit card interest rate was over 18% as at May 2026, which is much higher than typical home loan rates. If you carry a card balance, the strategy can cost more than it saves.

How do extra repayments and redraw work?

An extra repayment goes onto the loan itself. It reduces the principal, so you pay interest on a lower balance from that point. In the early years of a loan, most of a scheduled repayment is interest, which is why an extra payment made early can cut a large amount of interest over the life of the loan. You can also switch to fortnightly repayments of half the monthly amount, which, as Moneysmart explains, results in the equivalent of an extra month's repayment each year because there are 26 fortnights.

The money is not sitting in a separate account. If the loan has a redraw facility, you may be able to withdraw those extra repayments later. Access depends on your loan terms. Some lenders limit how much you can redraw, charge a fee, or delay access. Fixed-rate loans often restrict extra repayments, or allow only a limited amount each year, with break costs if you pay more.

That is the practical difference between an offset and redraw. Both can reduce interest. An offset keeps your savings in a separate account you can usually access in the ordinary way. Redraw is a request to take back extra payments already applied to the loan, on the lender's terms.

If you make a large extra repayment and later need the money, redraw delays or limits can be a problem. If you do not need access, applying the cash to the principal can be simpler, and it may let you avoid paying for an offset feature. Neither option is automatically better.

What changes if I invest the money instead?

Investing the same cash is a different decision because the return is not certain and the tax treatment is different.

The interest you avoid by using an offset, or by making an extra repayment, is a saving at your home loan rate. If the loan rate is 6% a year, $50,000 that stays in an offset, or that is paid off the principal, saves $3,000 of interest over a year if the loan rate and the $50,000 balance both stayed constant. On a principal-and-interest loan the principal also falls, and the offset balance will move as you spend and receive money, so the actual saving will differ. The illustration is still a useful starting point: the "return" is your loan rate, and you do not pay income tax on interest you never incurred.

If you instead invest the $50,000, you might earn more than 6% after fees, or you might earn less, or you might lose part of the capital. Earnings such as interest, dividends or rent are usually taxable in the year they arise, at your marginal rate, including the Medicare levy where it applies. Capital gains may be taxable when you sell, and the CGT rules themselves change from 1 July 2027 for gains that accrue from that date. Those rules are covered in the Never Lose Interest guide to CGT old versus new rules.

A comparison that says "invest if you can earn more than your loan rate" is incomplete unless it also allows for tax, fees, the risk of loss, and whether you might need the money back at a bad time. A comparison that says "always pay off the mortgage first" ignores the value of an emergency fund, the cost of a higher-rate consumer debt, and the fact that some people have a long investment horizon and a loan they can comfortably service.

There is no official rate of return that makes investing the better choice in every case. The Never Lose Interest calculators can show the interest saved by a lower loan balance, and the effect of compounding on an invested amount under an assumed rate you choose. They cannot tell you what that rate will actually be.

How should I compare the three options?

Work through these questions with your own numbers, rather than a rule of thumb.

What rate am I actually paying on the mortgage, after any package discount, and what fees do I pay for an offset or for redraw? A slightly higher loan rate, or an annual package fee, can wipe out the saving from a small offset balance.

Do I need access to the cash? If the money is your emergency fund, an offset usually keeps it available without a redraw request. If you are confident you will not need it, an extra repayment may be enough.

Is the loan fixed or variable? Extra repayments can be limited on a fixed rate. Offset features are also more commonly available with variable loans, though that is a product question, not a law.

Do I have more expensive debt? Paying off a credit card or personal loan, where rates are much higher, will usually save more interest than lodging the same money in a home loan offset.

What tax would I pay on investment earnings? Compare the after-tax, after-fee return you would need with your loan rate, and be honest about the risk that the return will not show up in the year you need it.

Is the offset actually linked, and will it stay linked if I refinance? Confirm it in your statements or app, and check again after any loan change. The refinancing guide covers switching costs and what to re-check after settlement.

A lower interest rate on the loan itself, as Moneysmart notes, can also save more than fine-tuning the last few thousand dollars of offset balance. Compare the loan, not only the feature.

Frequently asked questions

Is an offset account tax-free?

You do not pay income tax on the interest you avoid. The account itself does not usually earn interest, or earns very little, because its job is to reduce loan interest. There is no special tax deduction for using an offset.

If I make extra repayments, can I get the money back?

Only if your loan allows redraw, and only on the lender's terms. Do not assume redraw is as flexible as a transaction account.

Should I use my emergency fund to pay down the mortgage?

If you then have no accessible cash, a later emergency can force you onto a more expensive form of credit. An offset is often used precisely so the emergency fund still reduces interest while remaining available. Whether that is worth any extra loan cost is a personal judgment.

Does paying extra off an investment loan work the same way?

An extra repayment or offset can still reduce interest on an investment loan. The interest on a loan used to produce assessable income may be deductible, subject to the usual rules, including the negative gearing changes from 1 July 2027 for some residential properties. Reducing deductible interest can also reduce a tax deduction. That does not make the decision automatic either way. Get advice if the loan is for an investment.

Will investing in super beat paying down the mortgage?

Salary sacrifice and extra super contributions have their own caps, contributions tax and preservation rules, which are covered in the salary sacrifice and super calculator guides. Super may be tax-effective, but the money is generally locked away until you meet a condition of release. It is not a substitute for an accessible offset balance.

General information warning

This article is general information only. It is not personal financial product advice, a loan recommendation, or a forecast of investment returns. It does not take into account your objectives, financial situation or needs. Loan features, fees, break costs and tax treatment depend on your contract and your circumstances. Consider seeking advice from a licensed financial adviser or a registered tax agent before you make a decision.

Sources

Last reviewed: November 2026.