Offset account vs extra repayments: which is better?
An offset account and extra repayments both cut the interest on a home loan, but only one leaves the money available to take back out. On interest saved, they are identical. The tax treatment is not, and for anyone who might one day rent out their home, that difference is worth more than every dollar of interest either option saves.
Key takeaways
- At the same rate, a dollar in a 100% offset and a dollar of extra repayment save exactly the same interest. Australian home loan interest is calculated daily on the net balance.
- The equivalence breaks if the offset is partial, if the offset loan charges a higher rate, or if a package fee eats the saving.
- The ATO treats a redraw as a new borrowing. Redraw for private spending and you permanently lose that deductibility if the property later becomes a rental.
- Redraw is a facility your lender can restrict. ME Bank cut customers' available redraw without notice in 2020.
- Check your offset is actually linked. ASIC found banks repaid over $55 million for offset failures, and 55% of documented cases were accounts opened but never linked.
Australian lenders calculate home loan interest daily. Each day the lender subtracts your offset balance from your loan balance, then charges interest on what is left.1
That single fact settles the arithmetic. A dollar in offset and a dollar paid off the loan remove the same dollar from the interest base, for every day it sits there. The Reserve Bank puts it the same way: prepayments through redraw and deposits into an offset "have a similar economic effect".2
So the maths is a tie. Almost every article on this subject says so and then stops.
The interesting part is everything the tie does not cover.
When the tie stops being a tie
Three things break the equivalence, and all three are worth checking before you decide.
A partial offset does not offset everything
Most Australian offsets are 100% offsets on variable loans. Partial offsets exist, usually attached to fixed rate products, and they are a different animal. On a 40% partial offset, $50,000 in the account reduces the interest base by only $20,000.3
Against a partial offset, extra repayments win outright. Every dollar counts, rather than forty cents in the dollar.
The offset loan often costs more
Offsets usually come bundled into a package. Westpac's Premier Advantage Package charges $395 a year.4 Bank of Melbourne, BankSA and St.George charge the same on their Advantage Package.
At roughly 6%, a $395 fee needs about $6,600 sitting in offset just to break even.5
The rate premium matters more. Comparison data puts basic variable loans around 5.89% to 6.29% and full offset variable loans around 6.29% to 6.59%, a gap of roughly 0.30 to 0.40 percentage points.6 On a $500,000 loan, a 0.30 point premium costs $1,500 a year. You would need about $50,000 permanently in offset before the feature pays for itself.
This is where a lot of people go wrong. NAB's own customer data suggests around half its offset customers hold up to $20,000.7 On a large loan with a rate premium, that balance is not covering its cost.
Redraw is a facility. Offset is a deposit.
This distinction sounds like pedantry until it happens to you.
Money in an offset account is a deposit you own. Extra repayments are different: they reduce the loan principal, and redrawing them is a fresh drawdown. The RBA notes that an offset withdrawal does not affect the principal, whereas a redraw increases it.2
Standard loan contracts let lenders review, suspend or cancel a redraw facility, in some cases without notice.8
In April 2020, ME Bank did exactly that. It reduced available redraw balances on legacy home loans without warning. One documented customer saw available redraw fall from $92,700 to $76,200 in six days, a cut of $16,500.9 About 4% of ME's customers were affected.
The bank apologised. Its chief executive said they were trying to do the right thing but went about it the wrong way, and resigned three months later. The Banking Code Compliance Committee found the conduct amounted to serious and systemic breaches of the Banking Code.9
ME never took anyone's money. It reduced what customers could borrow back. That is the difference, and the contract permitted it.
The tax point that decides it for most people
Here is the part almost no competing article covers properly, and it is usually the largest number in the whole decision.
Interest deductibility in Australia turns on what the borrowed money was used for, not on what the loan is secured against. The ATO ruling is explicit that a redraw is "a new borrowing of money", and that deductibility depends on the purpose of that new borrowing.10
Follow that through.
Keep the same $100,000 in an offset account and none of that happens. Withdrawing your own savings is not a borrowing, so the loan balance stays intact and fully deductible when the property becomes an investment.11
The ATO's own worked example makes the scale plain. A $300,000 investment loan refinanced to $400,000, with the extra $100,000 spent on personal credit cards, leaves only 75% of the interest deductible. Permanently.10
Over a thirty year loan that gap runs to tens of thousands of dollars. You cannot fix it retrospectively.
There is a second, smaller tax point. Interest you save through an offset is not income, so it is not taxed. Interest you earn in a savings account is assessable.12 At a 32% marginal rate, a 6% offset saving beats a 6% savings account by roughly a third.
Model it on your own numbers → Enter your loan, rate and offset balance to see the interest and years either approach saves.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 your offset is actually working
On 29 July 2026, ASIC published a review of eight banks covering more than 70% of Australia's $2.5 trillion home loan market.13
The findings are uncomfortable. Banks repaid over $55 million in compensation for offset account failures between September 2023 and August 2025. Across 204,000 loans settled in a six month window, 55% of documented failures involved an offset account that was opened but never linked to the loan. Another 22% were never opened at all.
Most of it came down to manual staff error. One customer was repaid more than $17,000.
Two minutes in your banking app is worth it. Confirm the offset shows as linked, and check again after any refinance or product switch.
Is your offset actually working? → Enter your balance, offset and the interest your statement shows. If the offset was never linked, the gap shows up here.So which one
| Your situation | Usually better |
|---|---|
| The home might become a rental one day | Offset, decisively. It protects the deductible balance. |
| You will never rent it out, and the basic loan is meaningfully cheaper | Extra repayments with redraw, if you accept redraw is discretionary. |
| Your realistic offset balance is small | Extra repayments. The fee or premium will outweigh the saving. |
| You want the money genuinely available | Offset. It is a deposit, not a facility. |
| You are on a fixed rate | Split the loan. Keep a variable portion with the offset. |
Fixed rate borrowers need one extra warning. Extra repayments above the annual cap trigger break costs, and caps vary widely by lender, commonly somewhere between $10,000 and $30,000 a year.14 Check your contract before making a large payment.
Mojo takeaway
Two options that save identical interest are not identical options.
One leaves your money as your money, and preserves a tax position you may need years from now. The other hands it to the lender and asks for it back later, on terms the lender can change.
If your home could ever become an investment property, that is not a close call.
References
All figures verified against the sources below in August 2026. Rates, fees and lender terms change, so check current product documents before deciding.
- ASIC MoneySmart, Mortgage offset accounts. Last updated 28 July 2026.
- Reserve Bank of Australia, Statement on Monetary Policy, Box E: Offset Account Balances and Housing Credit. August 2015. See also RBA Research Discussion Paper 2021-10, The Rise in Household Liquidity.
- Home Loan Experts, Partial Offset Account. Industry source, used for product prevalence only.
- Westpac, Premier Advantage Package Conditions of Use. Effective 19 December 2025.
- UnitMojo calculation: annual fee divided by interest rate.
- Mozo home loan database, 2026. Comparison site data, indicative only.
- NAB customer data, cited in company release. Proprietary marketing data, not an independent statistic.
- Standard Australian redraw facility contract terms, as collected by LawInsider. Terms vary by lender; check your own contract.
- ME Bank redraw reductions, April to May 2020. Reported in Money magazine; Banking Code Compliance Committee findings; ME Bank public statements.
- Australian Taxation Office, Taxation Ruling TR 2000/2, on line of credit facilities, redraws and deductibility.
- ATO guidance applying TR 93/6 and TR 2000/2 to offset account withdrawals.
- Australian Taxation Office, Taxation Ruling TR 93/6, loan account offset arrangements.
- ASIC, Report 837: Offsets, out of mind, and media release 26-173MR. Published 29 July 2026.
- Lender fixed rate extra repayment caps, collected from published product terms. Vary by lender and change over time.
Common questions
At the same interest rate, a dollar in offset and a dollar in extra repayments save almost identical interest. The real difference is access: offset money is spendable immediately, while extra repayments generally require a redraw request and may be restricted.
Usually through redraw, but lenders can set minimums, charge fees, or restrict access - and some can freeze redraw entirely. Offset money is simply your own account balance.