Money in pictures
How does an offset work?
An offset is a bank account linked to a home loan. Money in it can reduce the interest you pay.
This example uses a full offset: all $40,000 counts when the bank works out interest.
1 You owe $600,000.
This is your home loan: money you still need to pay back.
2 Keep $40,000 in the offset.
The bank account is linked to your loan. The $40,000 is still your cash. You have not paid it into the loan.
3 Pay interest on a smaller amount.
The bank subtracts the offset savings when it works out interest. You still owe $600,000.
About this example
A full offset reduces the balance used to calculate interest. It does not pay off the loan. Your cash stays in the separate offset account. Check fees and loan terms; some accounts only provide a partial offset.
Does putting $40,000 in an offset pay off $40,000 of the loan?
Read the full guide6 min · Examples, assumptions and what to check
An offset, in three steps
The debt stays. The interest bill shrinks.
Illustration of a 100% offset. Your repayments, access rules, fees and offset percentage depend on the loan. Extra repayments reduce the actual debt; offset cash does not.
Does the offset cover its extra costs?Follow where the money sits
An offset is a separate account linked to an eligible home loan. Extra repayments go directly towards the loan. Both can reduce interest, but the balances live in different places. Money in an offset generally remains account money, while access to extra repayments depends on the lender’s redraw rules. Check those rules rather than assuming the two features are interchangeable.
The interest arithmetic
Consider a hypothetical $600,000 loan with a constant $30,000 balance in a 100% offset. The interest calculation uses a net balance of $570,000. At an unchanged annual rate of 6%, that $30,000 would initially reduce interest by roughly $150 a month using a simple monthly approximation. The exact bank calculation usually uses daily balances, and the benefit changes when money moves in or out.
Why the repayment can stay the same
A lower interest charge does not necessarily mean the bank reduces your scheduled repayment. If you keep paying the same amount, more goes towards principal, which can shorten the loan. Howloop holds the standard principal-and-interest repayment constant, then models the offset and any extra monthly payment. The comparison isolates those features on the same assumed loan rate and term.
Compare costs as well as benefits
An offset feature can come with a package fee, account fee or different loan rate. A calculator that ignores those costs is useful for understanding the mechanics but cannot establish which loan is cheaper overall. Compare the total cost of the actual loan offers. If the offset balance is small or frequently withdrawn, use a lower average balance in your scenario.
Separate interest saved from repayment reduced
For the $600,000, 30-year loan at a constant hypothetical 6%, the model's standard monthly repayment is $3,597.30. In the first month without an offset, $3,000 is interest and about $597.30 reduces the debt. With a $30,000 offset, the interest is $2,850 and about $747.30 reduces the debt, assuming the same repayment. Your account has not received $150 of savings interest: the loan has been charged $150 less. That distinction matters when comparing the displayed loan balance with money you still hold in the offset account.
Use a fee break-even check before a long projection
Suppose an otherwise identical loan charges an extra $390 a year for a full offset, and both loans have the same hypothetical 6% rate. Dividing $390 by 0.06 gives $6,500. A constant $6,500 offset would roughly cover that additional annual fee before timing effects. A constant $30,000 would initially avoid about $1,800 of annual interest, leaving about $1,410 after the fee. This shortcut is only a first comparison. It assumes the loan balance stays above the offset and there is no rate difference; it cannot price a package with a higher loan rate.
Do not enter payday's balance as a permanent balance
An offset containing $30,000 on payday may hold much less after bills are paid. For a simple 30-day example, $30,000 held for 15 days and $10,000 for the other 15 days gives a $20,000 average daily balance. Entering $30,000 as a constant balance would exaggerate that pattern. Try $20,000 as an approximation and a lower balance as another scenario. Howloop does not model a daily cash-flow schedule, so its result will still differ from a lender calculating daily interest and individual transaction dates.
Avoid using the same cash twice
If you have $30,000 of available savings, you cannot both leave the full $30,000 in offset and pay that same $30,000 into the loan. To explore a lump-sum repayment, reduce the starting loan balance by that amount and set the offset to the cash actually left there. This also recalculates Howloop's scheduled repayment; your lender may handle repayments differently. The calculator's extra-repayment field means a new payment every month, not a one-off deposit. Comparing those two entries as though they represent the same cash commitment would be misleading.
Keep access and future use in mind
Before making extra repayments, check restrictions, redraw minimums and whether a fixed-rate period changes the rules. If the property could later have a different use, seek qualified tax advice about your own situation rather than assuming offset and redraw have the same tax consequences. The Howloop model makes no tax calculations.
Read the payoff date carefully
The offset balance in our calculation stays separate throughout the plan. It is not automatically transferred to pay off the final loan balance. This is a deliberate assumption: a loan fully covered by an offset may stop accruing interest while scheduled repayments continue to reduce the actual debt. The model excludes lender fees, interest-only periods and changes in rates.
Sources & update record
30 September 2026: added a three-step original illustration distinguishing the loan debt from the balance charged interest, and a link to the offset-fee break-even comparison. Source-check date retained; this update does not claim all sources were re-reviewed. 30 September 2026: replaced the short introduction with original everyday-picture scenes, plain definitions and all steps visible by default. Financial-source check dates are unchanged.
Published 18 Sept 2026 · Updated 30 Sept 2026. These dates do not guarantee rules are unchanged.
Published by Howloop. AI assists preparation. This lesson has not been reviewed by a licensed financial adviser. How we check our content