Offset Account Calculator Australia

How to calculate offset account savings

An offset account is one of the most powerful tools for reducing your mortgage costs. It works by reducing the loan balance that interest is calculated on. Every dollar sitting in your offset account is effectively "earning" you the same rate as your mortgage, and on an owner-occupier loan that return is tax-free, because interest you are never charged is not income.

The formula

With a 100% offset account, interest is only charged on the loan balance minus the offset balance:

Interest charged = (Loan balance − Offset balance) × Interest rate

So the first-year saving is roughly your Offset balance × Interest rate. The lifetime saving is much larger, but only on one condition: your repayment has to stay where it is. That condition is the whole mechanism, and it is why the two headline numbers on this page have to come from the same scenario.

Worked example

Take a $600,000 home loan over 30 years at an illustrative 6.19% p.a. (an example chosen to show the arithmetic, not a rate on offer), with $50,000 held in a 100% offset account. The repayment on the full $600,000 is $3,671 a month, and it never changes. Interest is charged on $600,000 − $50,000 = $550,000 to begin with, so about $33,756 is charged in the first year against $36,941 with an empty offset. That is $3,184 saved in year one, a little above the $3,095 you get from $50,000 × 6.19% by hand, because interest is charged monthly and each month's saving is itself sent to principal.

The $3,671 that used to cover that interest now goes to principal instead, so the balance falls faster, so less interest is charged next month. Run that forward and the loan clears in 25 years and 2 months instead of 30, having cost $507,495 in interest rather than $721,532. That is $214,036 saved and 4 years 10 months off the term, and the two are very nearly the same fact counted two ways: 58 months of $3,671 repayments you never have to make comes to $212,913. The remaining $1,123 is the last payment on each run, which is a part-payment rather than a full $3,671, so the two runs do not end on exactly the same fraction of a month. Check it yourself: on both runs, everything you pay is the $600,000 of principal plus the interest, so the money saved can only be the repayments not made.

Both figures rest on the same two assumptions, so treat them as a pair. If your lender drops your repayment as the balance falls, you keep the loan the full 30 years and the saving is a fraction of this. If you spend the offset balance, the saving stops the day you spend it. ASIC's MoneySmart works a comparable case, a $50,000 offset at 6.25%, and puts it at "over $3,000" of interest in one year and "nearly $230,000" across a full loan term; on the same inputs this calculator returns $3,216 and $227,212.

The compounding effect

The real power of an offset account comes from compounding, and it only works while the repayment stays level. Reduce the interest charged this month and more of that fixed repayment goes to principal; next month there is less balance to charge interest on, so more again goes to principal. That is a snowball, and on a 30 year loan it is worth hundreds of thousands of dollars and several years. Let the repayment fall to match the lower interest and there is no snowball, just a slightly cheaper month, every month.

Owner-occupier and investment loans are not the same tax question

On an owner-occupier loan the interest is not deductible, so a dollar of interest you are not charged is a dollar you keep whole. That is why the offset beats a savings account: the account's interest is assessable income and the offset's saving is not. On the worked example, $3,184 kept in full is what a savings account paying 10.44% gross would leave someone on a 39% combined marginal rate.

On an investment loan the interest is deductible, so the same $3,184 of interest you are not charged is also $3,184 of deduction you no longer claim. At a 39% combined rate that costs $1,242 of tax, leaving $1,942. A savings account is taxed on exactly the same footing, so the break-even gross rate is simply what the offset is earning, about 6.37%, and there is no tax advantage over a savings account at all. The offset is still worth having on an investment loan, for a different reason: parking cash in the offset rather than paying down the loan keeps the loan balance, and therefore the deduction, intact, and keeps the money liquid. Use the loan purpose toggle above so the page states your case rather than the other one.

Offset vs higher repayments

Both offset balances and extra repayments reduce interest. The key advantage of offset is flexibility, your money stays liquid and accessible. Extra repayments may be subject to redraw restrictions or fees. For investment properties, offset is generally preferred as it preserves the tax-deductibility of the full loan amount while still reducing interest costs.