Offset vs Savings Account Calculator (Australia)

What the offset vs savings calculator does

The offset vs savings calculator helps Australian borrowers decide the smartest place to keep spare cash. It compares the benefit of holding money in a mortgage offset account against holding the same money in a separate savings account, and it reports the after-tax annual difference so you can see the real gain in dollars.

The key insight the tool captures is that these two options are not taxed the same way. Interest saved through an offset is effectively tax-free, while interest earned in a savings account is assessable income taxed at your marginal rate. Ignoring that difference makes savings look better than they really are.

Offset accounts explained

An offset account is an everyday transaction or savings account linked to your home loan. Its balance is subtracted from your loan balance before interest is calculated. If you owe A$400,000 and hold A$50,000 in the offset, you are charged interest as though you owe A$350,000. The money remains yours to spend at any time, yet while it sits there it quietly cuts your interest bill.

Because you never receive that saving as interest income, there is nothing to declare on your tax return. The benefit is the full loan rate, untaxed.

Why redraw is not in this comparison

Redraw is often mentioned in the same breath as an offset, and while the money stays where it is the interest saving is the same. When you pay more than the required repayment, the extra reduces the loan balance that interest is charged on, and a redraw facility lets you take it back out later. The difference is what happens when you do.

The ATO's view, set out in Taxation Ruling TR 2000/2, is that extra repayments discharge part of the loan and a later redraw is a new borrowing. The interest on that new borrowing is deductible only to the extent the redrawn money is used to produce income. Redraw from an investment loan to spend privately and the interest on the redrawn part is not deductible. Pay savings into the loan on your home, later rent that home out and redraw the savings for a new deposit, and the redrawn part funds your new home rather than the rental, so its interest is not deductible either. An offset account works differently because it is a separate deposit account: the money in it never repaid the loan, so taking it out does not create a new borrowing, and the loan and any deduction on it stay as they were.

That tax difference depends on what the loan and the redrawn money are used for, which this calculator does not ask about, so it compares an offset with a savings account only. If the loan is, or may one day become, an investment loan, that is a reason to keep spare cash in an offset rather than in redraw.

How the calculation works

The calculator takes four inputs: your spare cash balance, your home loan interest rate, the interest rate a separate savings account would pay, and your marginal tax rate. From these it works out three figures.

• Interest saved with offset equals your balance multiplied by the loan rate. This is tax-free.
• After-tax savings interest equals your balance multiplied by the savings rate, then reduced by your marginal tax rate.
• Annual benefit is the offset saving minus the after-tax savings interest.

For example, A$50,000 against a 6% loan saves A$3,000 of interest. The same A$50,000 in a savings account paying 4% earns A$2,000 before tax, but at a 32% marginal rate you keep only A$1,360. The offset therefore leaves you A$1,640 better off across the year.

Why the after-tax comparison matters

A common mistake is to compare the loan rate with the savings rate directly. On that basis a 6% loan and a 4% savings account look close. But savings interest is taxed and offset savings are not, so the true gap is wider than the headline rates suggest.

The higher your marginal tax rate, the larger the advantage of the offset. A high earner keeps less of every dollar of savings interest, which pushes the after-tax savings return down and makes the offset comparison even more decisive. This is why offset accounts are especially valuable to borrowers on the top marginal rates.

What you need to enter

To get a reliable result, have these details ready:

• The amount of spare cash you could place in an offset or savings account.
• Your current home loan interest rate.
• The interest rate an alternative savings account would pay.
• Your marginal tax rate, which depends on your taxable income.

If you are unsure of your marginal rate, use the rate that applies to the top part of your income. Small changes in the rate shift the result, so an accurate figure gives a more dependable comparison.

Reading your result

The primary figure is the annual benefit of using an offset. A positive number means the offset leaves you better off over a year; the larger it is, the stronger the case for keeping cash in the offset rather than a savings account. The tool also shows the two components so you can see exactly where the advantage comes from.

Remember this is a single-year snapshot at the rates you enter. If your loan rate, savings rate, or tax position changes, run the numbers again. The comparison also assumes the full balance stays in place; if you regularly draw the account down, the real saving will be lower in proportion to the average balance held.

When to use this tool

This calculator is helpful when you want to:

• Decide where to park a lump sum such as a bonus or tax refund.
• Judge whether paying for a loan with an offset feature is worthwhile.
• Compare an offset against a term deposit or high-interest savings account.
• Explain to a partner why the offset usually wins.

Running the comparison whenever rates move keeps your cash working in the most efficient place. For most borrowers with a mortgage the offset comes out ahead, but seeing the actual dollar benefit makes the decision concrete rather than a guess.

This is general information only and not financial advice.

About This Offset vs Savings Calculator

Use this offset vs savings calculator to get an instant estimate based on the figures you enter. Adjust the inputs above to match your situation, or browse all our calculators to plan your next step.