In short: Money in a 100% offset account and money paid directly into your loan save exactly the same interest. Choose the offset if you may later turn the home into an investment property, because it preserves the original loan balance and keeps the interest deductible. Choose direct repayment (or a locked redraw) if you know you will spend what you can see, or if your loan charges extra for an offset.
Key takeaways
- $50,000 in an offset and $50,000 paid off the loan both cut interest by the same amount at the same rate.
- Offset keeps the money yours and accessible; extra repayments belong to the lender until you redraw, and redraw can be restricted.
- If the home later becomes a rental, redrawn extra repayments are new private borrowing and the interest on them is not deductible. Offset avoids this.
- Offset accounts usually come with a package fee or a slightly higher rate; basic loans with redraw are often cheaper.
- Discipline decides it for many people. If the balance will get spent, pay it in.
Our earlier post on offset account hacks covered how to squeeze the most out of an offset. This one answers the question that comes before it: should your spare cash sit in an offset at all, or go straight into the loan? The maths is a draw. The decision comes down to three things: how you behave, what your loan charges, and what you plan to do with the property later.
The interest maths is identical
For illustration, at 6.00% p.a. on a $600,000 loan over 30 years, the repayment is $3,597 a month. Suppose you have $50,000 spare.
| Option | Interest charged in year one | Loan balance the bank sees | Money you can access |
|---|---|---|---|
| $50,000 in offset | Calculated on $550,000 | $600,000 | $50,000 any time |
| $50,000 paid into the loan | Calculated on $550,000 | $550,000 | Only via redraw, if allowed |
Same interest saving, roughly $3,000 in the first year. Keep the $50,000 there and keep the repayment unchanged, and either option knocks years off the loan. Test your own figures in the offset calculator and the extra repayments calculator.
Flexibility: whose money is it?
An offset is a transaction account. The money is yours, it is at call, and the lender cannot decide to keep it. Extra repayments are different. Once paid in, they reduce the debt, and getting them back depends on the loan's redraw terms. Lenders can:
- charge a redraw fee or set a minimum redraw amount,
- restrict redraw on fixed-rate loans, sometimes entirely,
- reduce or cancel redraw if the loan falls into arrears or the lender changes policy, and
- take longer to process a redraw than an offset transfer.
For a family in Roxburgh Park building an emergency fund, or a couple saving a deposit for an investment property, the offset is the safer home. Our offset vs redraw guide goes deeper on the mechanics.
Discipline: the honest question
Money you can see gets spent. If your offset balance drifts down every few months because it is "right there", the theoretical flexibility is costing you real interest. People who know this about themselves often do better paying extra directly into the loan, or into a redraw facility they treat as untouchable.
The tax angle for future investors
This is where offset and paying down stop being equal, and it is the section to read carefully if there is any chance your current home becomes a rental.
Interest is deductible when the borrowed money was used to produce assessable income. What matters is the purpose of each drawdown, not the security. So:
- You pay $100,000 extra into your home loan, then redraw it to buy your next home. The redraw is a new borrowing for a private purpose. When you move out and rent the first property, the interest on that $100,000 portion is not deductible, even though the loan is secured against the rental.
- You park $100,000 in the offset, then move it to the new home's purchase. The original loan balance never changed. When the first property becomes a rental, interest on the full original balance remains deductible because the original purpose (buying that property) is unchanged.
Worked example: Craigieburn home becomes a rental
You buy a $650,000 house in Craigieburn with a $580,000 loan. Over six years you accumulate $120,000 spare and then upgrade to a larger home in Greenvale, keeping the Craigieburn house as an investment.
| Extra repayments then redraw | Offset then transfer | |
|---|---|---|
| Loan balance before upgrade | $460,000 | $580,000 (with $120,000 in offset) |
| Cash to new home | $120,000 redrawn | $120,000 from offset |
| Investment loan balance after upgrade | $580,000 | $580,000 |
| Deductible portion | $460,000 only | Full $580,000 |
| Annual interest at 6.00% p.a. | $34,800 | $34,800 |
| Deductible interest | $27,600 | $34,800 |
| Difference in deductions | $7,200 a year |
At a 37% marginal rate plus the 2% Medicare levy, $7,200 of extra deductions is worth about $2,808 a year in tax, every year, for as long as the loan runs. The ATO's rental property guidance covers the purpose test in detail, and our negative gearing guide shows how the deduction flows through your return. When the rental is eventually sold, our capital gains tax on property page covers the tax on the gain.
If you are considering rentvesting or a future upgrade, this alone usually settles the question in favour of the offset.
What the offset costs you
Offsets are rarely free. Common trade-offs:
- Package fees. Many offset loans sit inside a professional package with an annual fee. On a $600,000 loan a $395 fee is about 0.07% a year.
- Rate loading. Some basic loans without an offset carry a lower headline rate than the same lender's offset product.
- Partial offsets. A few products offset only a portion of the balance; check the loan is 100% offset.
If your offset balance will be small for the foreseeable future, the fee may cost more than the interest you save. That is a case for a basic loan and direct repayments, or for refinancing to a lender whose offset comes without the package. Moneysmart has a plain-English comparison of loan features worth reading alongside this.
A decision checklist
- Could this home ever become a rental? If yes, offset.
- Will you actually keep the money there? If no, pay it in.
- Does the offset cost a fee or a higher rate? Compare it with the interest saved on your realistic balance.
- Is any part of the loan fixed? Check whether offset or redraw is restricted.
- Do you need a buffer? Keep it in offset regardless of what you do with the rest.
Frequently asked questions
Is interest on money in an offset account taxable?
No. An offset account does not earn interest; it reduces the interest charged on the loan. That saving is not income, so there is nothing to declare and no tax to pay, unlike a savings account where interest earned is taxed at your marginal rate. That makes an offset more valuable than a savings account paying the same rate.
Can I have an offset on an investment loan?
Yes, and it is often the smartest place for spare cash once your home loan is gone, because the interest saved is on a deductible loan. Be aware that reducing deductible interest reduces your deduction, so the net benefit is the interest saved less the tax you would have recovered on it. It is still a positive outcome; it is just smaller than the headline saving.
What if my lender limits extra repayments on a fixed rate?
Most fixed loans cap extra repayments at a set amount each year and restrict or remove redraw. If you want to keep paying down aggressively during a fixed term, put the surplus in an offset linked to a variable split instead. Our fixed vs variable guide explains how splits work.
Talk to GNT Finance
Whether an offset or a basic loan with redraw is right for you depends on your plans for the property as much as the rate, and Gorakh Timilsina will walk through both before recommending a lender. There is no cost to you for our home-loan service in most cases. Book a free consultation or call 0426 403 703.
This page is general information only and not legal, tax or financial advice. Laws change — confirm current rules with the State Revenue Office, the ATO or a licensed professional.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.