How does an offset account work?
An offset account is a transaction account linked to your home loan, where the balance is subtracted from the loan before interest is worked out. It is a savings account, not a repayment. The money stays yours and you can spend it tomorrow. What it does is shrink the balance your bank charges interest on, every single day it sits there.
Key takeaways
- Your lender subtracts the offset balance from your loan balance, then charges interest on the difference. This happens daily.
- The money is not gone. It is a deposit you own and can withdraw at any time, unlike extra repayments.
- Your repayment does not change. What changes is how much of it goes to principal instead of interest.
- Interest you save is not taxed. Interest earned in a savings account is, which is why an offset usually beats one at the same rate.
- Around 40% of Australian mortgages have an offset attached, holding roughly $349 billion.
Most Australian home loans calculate interest daily. Each day, the lender takes your loan balance, subtracts whatever is sitting in your linked offset account, and charges interest on what remains.1
That is the whole mechanism. Everything else follows from it.
What is the money actually doing?
People ask whether offset money is paying off their mortgage. It is not, and that turns out to be the point rather than a catch.
Your loan balance does not move. Put $20,000 in offset against a $400,000 loan and you still owe $400,000. What changes is that the bank now charges you interest as though you owed $380,000.
The money remains a deposit in your name. You can spend it tomorrow. Every day it sits there, it is quietly cutting your interest bill, and the moment you take it out, that stops.
Note what did not happen. Your required repayment stayed exactly the same.
That matters more than it sounds. Because the repayment is unchanged but the interest portion shrank, more of every payment now attacks the principal. The loan shortens without you paying a cent extra.
Is an offset better than a savings account?
At the same headline rate, an offset wins, and the reason is tax.
Interest you earn in a savings account is assessable income. Interest you avoid through an offset is not income at all, so there is nothing to tax. The ATO ruling on offset arrangements is explicit that no interest is derived and no income tax arises.2
Run it on the same $20,000.
| Offset at 6% | Savings at 6% | |
|---|---|---|
| Benefit before tax | $1,200 interest avoided | $1,200 interest earned |
| Tax at 32% | Nil | $384 |
| You keep | $1,200 | $816 |
In practice the gap is wider still, because mortgage rates sit above savings rates. Comparison data in 2026 puts variable home loans around 5.9% to 6.6% while leading savings accounts pay roughly 4.5% to 5.2%.3 The offset is earning more, and keeping all of it.
For a savings account to match a 6% offset for someone on a 32% marginal rate, it would need to pay about 8.8% before tax. Nothing does.
The catch, and it is a real one
Offsets are rarely free.
Most come bundled into a package with an annual fee. Westpac charges $395 a year on its Premier Advantage Package, and several other lenders charge the same.4 Some loans instead carry a higher rate: roughly 0.30 to 0.40 percentage points above an equivalent basic variable loan.3
So the feature has to earn its keep.
This is where many people lose. NAB's own customer data suggests around half its offset customers hold up to $20,000.5 On a large loan with a rate premium, that balance is not covering what the feature costs.
An offset with nothing in it saves nothing and still charges you the fee.
Nothing will tell you if it stops working
This is the part worth understanding before anything else. When an offset account fails, your repayment does not change. The same amount leaves your account on the same day. More of it goes to interest and less to the principal, and the loan quietly runs longer.
There is no letter, no alert, no line on the statement saying something is wrong. ASIC found that half the banks it reviewed do not show the interest an offset has saved anywhere in the app: it appears only on statements. So the harm is not just hidden from you, it is hidden in a document most people never open.
Which is why the checking has to be yours. ASIC found the banks had failed to detect 77% of the offset failures they eventually reported until ASIC asked them for the data. One bank had not looked at the exception report that was its main tool for finding these failures in almost five years. That is not a reason to distrust your bank; it is a reason not to assume anyone is watching.
ASIC published a worked example of the cost. A $750,000 loan over 30 years at 6.25%, with $50,000 kept in an offset that was requested at settlement but never linked. After one year, more than $3,000 in extra interest. Had nobody noticed for the life of the loan: nearly $230,000 of interest savings foregone, and four additional years of repayments.
Around $349.1 billion sits in Australian offset accounts. Almost nobody who holds one has ever checked whether it is working, because until this report there was no particular reason to think it might not be.
A loan change can unlink your offset
The least known failure, and the most expensive. Refinancing, moving from a variable rate to a fixed rate, or switching product will typically de-link an existing offset account, and you usually have to make a fresh request to re-link it. It does not carry over.
ASIC's July 2026 review found complaint records suggesting many customers did not know a separate request was needed. At one bank, the settlement team failed to tell the customer's broker that the offset needed re-linking after an internal refinance: two of those customers paid more than $17,000 in extra interest. In another case a bank error removed the link during a mid-loan change, and the customer paid more than $3,500 in additional interest in just over a month before noticing.
So check immediately after any change to the loan, not annually. A refinance, a fixed term starting or ending, a product switch, or a split.
Check yours is actually linked
In July 2026, ASIC published a review of eight banks covering more than 70% of Australia's home loan market.6
Banks had repaid over $55 million in compensation for offset account failures. Of the documented failures, 55% involved an offset that was opened but never linked to the loan. Another 22% were never opened at all. Most of it was manual staff error.
One customer was repaid more than $17,000.
Open your banking app and confirm the offset shows as linked to the loan. Do it again after any refinance or product switch. It takes two minutes.
Is your offset actually working? → Enter what your statement shows and see the interest you would expect. An unlinked offset looks normal on a statement but shows up in the arithmetic. See what an offset does to your loan → Model your balance, rate and offset amount to see the interest saved and the years cut from the term.What to do if it is not right
Finding a gap is not the same as being owed money, so work through it in order. A difference of a couple of percent between your statement and any calculator is normal, because your balances move daily while a calculator uses averages. Before assuming an error, rule out the innocent explanations: a rate change part-way through the period, fees bundled into the interest line, a repayment or redraw that moved the balance, or an offset that is partial rather than 100%.
If none of those explain it, the next step is the one that matters. Ask your lender for the daily calculation, in writing. You are entitled to a breakdown of how the interest was worked out, and asking in writing gives you a record. Ask for four things specifically:
- the daily loan balance and daily offset balance used for each day of the period
- the daily interest rate applied
- the date the offset account was linked to this loan
- whether the offset is 100% or partial
The third one is the evidence. If the link date is later than the date the offset account was opened, the gap between those two dates is the period you were paying interest you should not have been charged. That is the number a remediation is built on, and it is why the date matters more than the arithmetic.
Complain to the bank first, since they have a defined period to respond. If you are not satisfied with the answer, or they do not respond in time, the Australian Financial Complaints Authority handles disputes at no cost to you, and its decisions bind the bank. Keep your statements for the period, the date you believe the offset should have been linked, your correspondence, and your own calculation of the difference.
Where a bank has failed to link an offset, remediation generally means refunding the interest you should not have been charged. In the cases ASIC documented, individual amounts ran from small sums to more than $17,000.6
Which countries have offset accounts?
Offset accounts are common in Australia and New Zealand, and available in the United Kingdom, though far less widely used there. They are essentially absent from the United States market, where the closest equivalent is simply paying extra off the principal.
In Australia they are mainstream. Reserve Bank research puts offset accounts on around 40% of mortgages, and ASIC reported about $349 billion held in them as at March 2026, up 28% in two years.6,7
Common questions
Usually not. Your required repayment stays the same and the loan finishes earlier instead. If you want the repayment itself reduced, you generally have to ask the lender to recalculate it.
Most lenders do not offer a full offset on fixed rates. Some offer a partial offset, commonly 40%, which offsets only part of your balance. Splitting the loan is the usual workaround: fix part of it, keep part variable with the offset attached.
Offset balances at an Australian ADI are covered by the Financial Claims Scheme up to $250,000 per person per institution, the same as any deposit. Above that limit the guarantee does not apply.
Offset money is a deposit you own. Redraw is a facility to borrow back extra repayments you have already made, and lenders can restrict it. That distinction has real consequences, including for tax, and we cover it properly in the comparison piece below.
Mojo takeaway
An offset account is a savings account that pays your mortgage rate instead of a savings rate, tax free, while leaving the money in your hands.
That is a genuinely good deal. It is only a good deal if you keep enough in there to beat the fee, and if the account is actually linked.
Check both. Then mostly forget about it.
References
All figures verified against the sources below in August 2026. Rates, fees and lender terms change frequently, so check current product documents before acting.
- ASIC MoneySmart, Mortgage offset accounts. Last updated 28 July 2026.
- Australian Taxation Office, Taxation Ruling TR 93/6, loan account offset arrangements.
- Mozo home loan and savings account databases, 2026. Comparison site data, indicative and time sensitive.
- Westpac, Premier Advantage Package Conditions of Use. Effective 19 December 2025.
- NAB customer data, cited in company release. Proprietary marketing data, not an independent statistic.
- ASIC, Report 837: Offsets, out of mind, and media release 26-173MR. Published 29 July 2026.
- Reserve Bank of Australia, Research Discussion Paper 2021-10, The Rise in Household Liquidity.