Offset vs Paying Off Mortgage: What to Do When Rates Match

A 100% offset account reduces the loan balance interest is calculated on by exactly the amount sitting in the offset. So $100,000 in offset against a $650,000 loan means the bank charges interest on $550,000 — identical to if you'd paid $100,000 directly off the principal.

At a 6.19% variable rate, here's what that $100,000 saves you over a full year:

Loan balance	Annual interest	Saving vs no offset
$650,000 (no offset)	$40,235	—
$550,000 effective (with $100K offset)	$34,045	$6,190
$550,000 (paid down directly)	$34,045	$6,190

Dollar-for-dollar identical. The interest saving is the same $6,190 a year either way. So if the maths is a tie, why does anyone keep money in offset instead of just smashing it into the loan?

Money in offset is still yours — you can withdraw it instantly, any day, for any reason. Money paid directly off the principal technically isn't — you need to use redraw, and redraw has real-world catches.

• Redraw can be frozen. Banks have form here. During COVID, several lenders restricted redraw access. If you lose your job and the bank reassesses risk, they can refuse a redraw.
• Redraw changes the loan's tax character. If the property ever becomes an investment, money you redraw is treated as a new borrowing — and interest on it is only deductible if you use it for income-producing purposes. Offset doesn't contaminate the loan.
• Redraw can have fees and minimums. Some loans charge per redraw or set a $2,000 minimum.

If there's any chance you'll turn the property into a rental down the track — even a small chance — keep the money in offset. The tax outcome is materially better, and the interest saving is identical today.

There are two situations where dumping money straight against the principal makes more sense than offset:

1. The offset isn't 100%. Some "offset" accounts are only 40% or 80% offset — meaning only that proportion of your balance reduces loan interest. If you're paying $15/month in account fees for a partial offset that only saves you $300/year in interest, just pay down the loan.

2. You have zero willpower. Behavioural finance is real. Money sitting in an account you can see and touch tends to get spent. If the offset balance creeps down every month because "it's just sitting there", paying down the loan removes the temptation. You can't spend what isn't accessible.

For everyone else — disciplined savers, people with 100% offset, anyone who might turn the place into an investment — keep the cash in offset. The $6,190 interest saving is identical and you retain full flexibility.

Most lenders let you split your loan into two or more sub-accounts. A common approach for people building a large offset balance:

1. Build offset up to a comfortable emergency buffer (say, 6 months of expenses — around $30–50K).
2. Once the buffer is full, split the loan. Keep a smaller portion variable with the offset attached; fix the rest at a low rate if rates look attractive.
3. Any extra savings above the buffer go into paying down the variable portion, which closes out faster.

This gives you the safety of cash you can touch plus the psychological win of watching one loan shrink to zero. On a $650K loan, splitting $150K variable / $500K fixed and putting surplus against the variable portion can wipe it out in 7–8 years while the fixed portion keeps ticking along.

Three quick steps if you're sitting on cash and wondering which way to jump:

1. Check your offset is 100%. Log in and read the product name. If it says "partial offset" or the account fee is over $10/month for under $50K balance, you're probably better off in redraw or paying down directly.
2. Run the numbers on your actual balance. Use our mortgage calculator to see how extra repayments shorten your loan term, and our offset calculator to model the interest saving from building up the offset instead.
3. Decide once, then automate. Set a direct debit from salary into either offset or extra repayments, and don't think about it again. The worst outcome is flip-flopping between strategies and never building either.

The answer for most Australians with a 100% offset: build offset first, keep a healthy buffer, then aggressively pay down once the buffer is secure.