Offset Loans: How They Work, Costs, and Tax Treatment

An offset loan is a mortgage with a linked everyday account whose balance is subtracted from your loan principal before interest is calculated, so you pay interest only on the net difference. If you owe $500,000 and hold $20,000 in the linked account, interest accrues on $480,000.¹ The money stays yours and remains fully accessible; the trade-off is that it earns no deposit interest, and the loan itself usually costs a little more than a basic mortgage.

How the Interest Calculation Works

Most lenders calculate offset interest daily and charge it monthly. What sits in the account on any given day is what counts for that day. If $15,000 is in the account for only four days of the month, your mortgage balance is reduced for those four days, not the whole month.² The arithmetic rewards keeping the balance high for as long as possible.

The linked account itself behaves like a normal transaction account. You can deposit your salary, pay bills, and use a debit card, with the running balance quietly chipping away at the interest calculation.¹ Withdrawals are unrestricted, but each one increases the principal on which the next day’s interest is calculated.³

You get to choose how the saving shows up. Keep the monthly repayment the same and the loan pays off faster; reduce the repayment and free up cash flow instead.⁴

Full Offset Versus Partial Offset

A full (100%) offset reduces the interest-bearing principal dollar for dollar. This is the standard and most common type. A partial offset only applies a fraction of your balance: with a 50% partial offset, $50,000 in savings reduces the interest-bearing principal by $25,000. Full offsets are generally restricted to variable-rate home loans, while partial offsets sometimes appear on fixed-rate or basic products.⁵

Offset Versus Redraw

These two features often get muddled. Both reduce interest, but they’re structurally different and the difference matters.

An offset is a separate transaction account linked to the loan. A redraw facility is a feature of the loan itself that lets you pull back any extra repayments you’ve made above the minimum.⁶
Offset accounts come with everyday banking access, including debit card and ATM use. Redraw access is more restricted; some lenders impose minimum withdrawal amounts, processing delays, or no everyday-transaction capability at all.⁷
If the property later becomes an investment, the tax treatment diverges. Withdrawing from an offset account does not affect the deductibility of mortgage interest. Redrawing funds for personal purposes can reduce the portion of loan interest that qualifies for a deduction.⁶

Many lenders offer both, and some borrowers run them side by side. The usual guidance: offset suits borrowers who want daily access to their cash, while redraw suits those who prefer a barrier between savings and spending.⁷

What It Costs and When It Pays Off

Offset loans typically carry higher interest rates and more fees than a basic variable mortgage. In Australia, the rate premium for an offset-linked loan commonly runs 0.1% to 0.3% above a basic variable loan, with an annual package fee of around $395. As a rough rule, you need a consistent offset balance of at least $20,000 to $30,000 before the interest saved outweighs the premium and fees.⁸ Below that, a simpler loan with a redraw facility is often cheaper overall.

There is an opportunity cost too. Money in an offset earns no deposit interest, so you’re betting the mortgage-interest reduction beats the alternatives: high-interest savings, term deposits, or investments. For borrowers with modest savings, the product may not deliver a meaningful benefit. The product range is also narrower than for standard mortgages, with most offset features limited to variable-rate loans.⁹

The Australian government’s Moneysmart guidance frames the decision this way: an offset is worth considering if you have a large home loan, maintain a regular savings balance, and want flexible access to your money. It may not be worthwhile if your balance is typically low or if the offset-eligible loan is meaningfully more expensive than a simpler alternative.¹

Linking More Than One Account

Many lenders let you link multiple accounts to a single mortgage. In Australia, NAB and St.George each allow up to ten linked offset accounts per loan, which lets borrowers compartmentalize savings while still reducing interest.¹⁰¹¹ The combined balances across all linked accounts are subtracted from the loan for the interest calculation.

Australian lenders tend to limit whose accounts can be linked. NAB, for instance, requires the linked transaction account to be in the name of a borrower on the loan, though joint borrowers can link both individual and jointly held accounts.¹⁰

In the United Kingdom, a family offset mortgage goes further. A parent or relative can link their own savings to the borrower’s mortgage. On a £200,000 loan with £50,000 from a parent linked, the borrower pays interest on £150,000. The family member forfeits interest on the linked savings, and the arrangement can shorten the loan term or reduce monthly payments. Lender rules vary on which relatives qualify, and most require the savings to be held at the same institution as the mortgage.¹²

Where Offset Loans Are Available

Australia is the largest and most established offset market. Roughly 40% of mortgage holders use an offset account, and offset-linked loans represent about 45% of mortgage lending by volume.¹³¹⁴ As of early 2025, approximately $307 billion sat in offset accounts across the country, with 52% of all mortgages linked to one as of mid-2025.¹⁵ Major lenders including Westpac, Commonwealth Bank, NAB, ANZ, ING, St.George, and Bank Australia all offer the product.

In the United Kingdom, offset mortgages exist but are far rarer. Academic research found that mortgages with offset or redraw features accounted for about 16% of UK mortgages by volume in 2009 and had fallen to roughly 2% by 2023.¹⁶ Current providers include Barclays, which offers offset tracker mortgages,¹⁷ and Yorkshire Building Society. UK offset products tend to be variable-rate trackers linked to the Bank of England base rate.

In New Zealand, Kiwibank offers an offset home loan that allows borrowers to link up to eight everyday accounts, including those of a spouse, partner, child, or parent.¹⁸ Westpac New Zealand offers a “Choices Floating with Offset” product.¹⁹ Both are variable-rate.

Offset mortgages are generally not available in the United States, because US tax laws make the structure impractical.³ The closest American product is the “all-in-one mortgage,” a first-lien product that combines a mortgage, a home equity line of credit, and a checking account. Deposits are applied directly to reduce the principal balance, and the borrower can re-access equity through the HELOC component without refinancing. CMG Financial is one lender known to offer a version of this product.²⁰ All-in-one mortgages typically carry higher interest rates, require excellent credit, and demand strong discipline, because easy access to equity can let the loan balance grow.²¹

Tax Treatment

The core tax logic is the same wherever offset loans are offered: because the linked account earns no interest, there is no savings-interest income to declare. The benefit arrives instead as a reduction in mortgage interest charges, which is not treated as taxable income.

This matters most for higher earners in the UK. The personal savings allowance for higher-rate taxpayers is just £500 a year, and additional-rate taxpayers have no allowance at all.²² By holding cash in an offset rather than a savings account, these taxpayers avoid income tax on interest they would otherwise owe, while receiving a mortgage reduction that is worth more per pound.

In Australia, savings held in an offset account are likewise not treated as taxable income.²³ The arrangement also preserves the full tax deductibility of mortgage interest if the home is later rented out, which is not the case when extra repayments are made directly onto the loan and later redrawn for personal use.⁶

1
Moneysmart (Australian Government). Mortgage Offset Accounts
2
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3
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4
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5
InvestorKit. Offset Account Basics
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ANZ. Differences Between Redraw and Offset
7
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Shern Advisory. How Offset Accounts Work and How They Save You Interest
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St. James’s Place. What Are Offset Mortgages
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NAB. Offset Accounts
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St.George. Offset
12
Habito. Family Offset Mortgage
13
Reserve Bank of Australia. Institutional Features of the Australian Mortgage Market
14
University of Sydney. Mortgage Offset Accounts May Deepen Wealth Divide
15
Australian Financial Review. Issues in the $307b Mortgage Offset Market Spur ASIC Probe
16
Wiley Online Library. Mortgage Offset Accounts
17
Barclays. Offset Mortgage
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Kiwibank. Offset Mortgages
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Westpac NZ. Choices Floating With Offset
20
Investopedia. Offset Mortgage
21
Investopedia. All-in-One Mortgage
22
RSM UK. How an Offset Mortgage Could Provide Better Tax Savings
23
loans.com.au. Paying Off Your Mortgage vs Using an Offset