Should I put money in my offset or pay off my mortgage early?
Dominic Beattie
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- Mortgage holders with enough spare cash to pay off their home loans may not automatically choose to do so
- Some borrowers will decide instead to store the money in their offset accounts and keep making their home loan repayments
- There are pros and cons associated with both options
- The choice may also be influenced by whether the home loan comes with an offset account or a redraw facility
Aussies love storing cash in offset accounts. According to official APRA data, almost $350 billion was being held in offset accounts as of March 2026 - a 28% increase over just two years.
But could a homeowner's spare cash be better spent paying down a home loan balance instead?
Understanding your options
First up, let's be clear on the alternatives:
The offset option
An offset account is a transaction account attached to a home loan. You don't earn any interest on the money you keep in there but the account balance is subtracted from the principal of your home loan when interest is calculated. Essentially, it saves you interest.
For example
If you have a $500,000 mortgage and $100,000 in an offset account, you will only pay interest on $400,000 ($500,000 - $100,000).
That could save $276,000 in interest over the course of a 30-year home loan, assuming a constant 5.5% p.a. interest rate, according to Savings.com.au's Offset Calculator .
The paying-off-principal option
Putting the cash straight into your home loan has exactly the same effect. It will reduce the principal of your loan and, therefore, the interest you pay by the same amount.
But putting money straight into your home loan essentially hands that cash to your lender. You can regain access to it via a redraw facility but that may come with a delay or restrictions around it, depending on your loan's redraw policy. In simple terms, there may be a roadblock to you getting it back - or retrieving all of it - should you need it down the track.
Compare home loans with offset accounts
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.29% p.a. | 6.33% p.a. | $3,092 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
6.04% p.a. | 6.29% p.a. | $3,011 | Principal & Interest | Variable | $248 | $350 | 70% | |||||||||||||
6.49% p.a. | 6.52% p.a. | $3,157 | Principal & Interest | Variable | $0 | $350 | 70% |
What's the same?
There'll be some outcomes that are the same regardless of which option you go with.
- You'll save on interest: Every dollar you have in your offset or paid into your loan account will reduce your interest by the same amount.
- You'll pay off your loan faster: Both options will see you cut the same amount of time off your loan term.
- You won't pay tax on the cash: If you were to keep your spare cash in a savings account, you would have to pay tax on the interest it earns at your marginal tax rate. You don't pay tax on cash kept in an offset account or paid into your home loan.
What's different?
But there are some other factors to consider.
- Accessing your cash: With an offset account, your money is your own and you can do with it what you choose. If you've put it into paying down your loan balance and want to retrieve it, you are redrawing it from your lender and there may be restrictions around this.
- Psychological factors: Keeping money in offset gives you unfettered access to it which may not be the best option for the undisciplined. Putting it straight into your loan can create a psychological barrier that the money now belongs to the lender, dulling the temptation to access it.
- Interest rates and fees: Home loans with offset accounts typically come with higher interest rates and monthly fees. They are almost never offered with the lowest interest rate loans on the market.
- Tax implications for investors: If the home is a rental property or may become one in the future, offset accounts offer tax deductibility benefits that redraws may not. Because your offset sits outside the loan, withdrawing from funds from it alters the overall interest you pay, but not the loan balance. However, redrawing funds from a home loan can mean they lose their tax deductibility status if you spend the money on something else. If you're an investor, it's recommended you consult a tax professional to be clear on what is best for your circumstances.
What the expert says
"This is a subjective topic in our industry. It's hard to have a blanket solution as so much will depend on each individual and their financial situation.
"The biggest benefit of an offset account is that it allows you to save on the interest expense of your home loan repayments. You still have access to your cash while still saving on your interest expense.
"But offset accounts aren't free. Almost all lenders charge an annual or a monthly fee for having an offset account product as part of your home loan.
"Also, many borrowers are under the misconception that when we use the term 'save on interest expense' that [having an offset account] will bring their monthly repayments down - clients call me back about this all the time!
"Your minimum repayment doesn't actually come down, no matter how much you have in your offset account. The repayment stays the same."
Should I pay off my home loan entirely or keep the funds in offset?
Being mortgage-free is the dream of many a borrower but if you find yourself in the position where you have enough funds to pay off your home loan altogether, there are some factors to weigh up.
Pros of paying off your home loan
- You will be financially free: You will no longer have to stress about mortgage payments, interest rates going up, or how you'll keep your home if you lose your job.
- You can create new cash flow: You can direct what you spent on home loan repayments to other ventures, such as a new car, holiday, investments, or simply start putting the funds into a savings account where they can earn interest.
- No more lender charges: Paying off your loan will end annual package fees, monthly fees, and other charges associated with your loan.
Cons of paying off your home loan
- Less liquidity: If you pay off your loan entirely, your wealth will be largely tied up in your home. This makes money harder to access in an emergency which may require you to refinance your home or sell it. Neither option offers instant access to cash.
- Losing access to low-cost funds: Home loans generally offer the lowest interest rates on the market so rather than taking out another loan for a car or other personal reasons, using spare cash attached to your home loan can be more cost-effective for major purchases.
- Losing tax benefits: If you're an investor, paying off your loan will see you lose tax benefits you may have been claiming on interest expenses. It may be more cost-effective to keep the loan open and excess funds in offset. (It's recommended to consult a tax professional on what will be best for your individual circumstances.)
Pros of keeping your loan open and retaining your offset account
- Keep equity accessible: Some borrowers may feel more comfortable keeping readily accessible cash on hand
- Access to low-cost funds may improve home value: Keeping your money in offset gives you options should you need to renovate or fund major projects on your home which can also effectively increase its value. It also saves you from having to go through the loan approval process again
- Keep tax benefits going: If you're an investor, keeping funds in offset rather than paying out your investment loan may see you retain tax benefits.
Cons of keeping your loan open and retaining your offset account
- Loan expenses continue: Even if you're no longer paying any interest on your home loan, you're still tied to the lender and paying monthly fees and loan admin costs.
- Missing out on earning interest on your cash: Keeping your funds in an offset account means they're earning no interest and even if you're no longer paying interest on a home loan, you could be financially worse off.
- You still have a debt: While your home loan remains, you still have an active debt. Credit reporting agencies regard your debt exposure as the same even if you have the remaining loan balance sitting in your offset account.
- You could lose your funds if the lender goes bust: While a very remote possibility, it's worth mentioning. Only $250,000 of a customer's money kept in offset is guaranteed under the federal government's Financial Claims Scheme . If you've got more than that sitting in an offset account, any amount over $250,000 will be lost if your lender goes under
What happens if you offset more than you borrowed?
If your offset account has a higher balance than your home loan, your regular repayments won't stop.
At this stage, it's likely you're no longer paying interest on your loan and the entirety (or vast majority) of your repayments will be going towards reducing the principal (unless you're making interest-only repayments).
Bear in mind, there is an opportunity cost in keeping more in an offset account than what's owed on the loan. The excess amount doesn't provide any form of return and would be better in a savings account where is can earn interest - or put into other investments.
Can a bank force you to repay your home loan?
Offset account
If the balance of your offset account equals - or is greater than - your outstanding loan balance, your lender can't force you to repay your home loan.
The money in your offset account is your money after all, so if you don't want to use the cash from an offset account to repay your home loan, your lender can't make you.
Redraw
But if you put more money into your redraw than your loan balance, different lenders will have different policies.
Some lenders won't automatically close your home loan account when the balance hits zero but may notify you to enquire about account closure and whether you wish to discharge your mortgage. This will involve some official paperwork.
Other lenders may leave the money sit in your loan account for a time in case you want to redraw it and after a period, may move to close the loan. It's wise to check on your lender's policy before you deposit funds that will drop your home loan account balance to zero.
Are mortgage borrowers at risk of losing access to their redraw facility?
The good news: If your bank collapses, it likely won't take your redraw facility with it.
The bad news: It is possible (albeit unlikely) that you could lose access to your extra repayments.
There are two situations in which this might occur:
1. Your bank collapses
In the event your bank goes bust, you aren't off the hook with your mortgage. Your loan will likely be sold to another lender, meaning you'll continue making repayments, just to a new institution. That's all well and good, except any funds kept in your redraw facility at the time might be absorbed into your loan, potentially making them inaccessible to you without refinancing.
2. Your lender changes its terms and conditions
Lenders offer redraw facilities as extra features on home loans. Despite being common, they're not a given - lenders don't have to allow borrowers access to extra repayments. Thus, there could feasibly be a situation in which your lender changes its policy regarding redraws, making borrowers jump through extra hoops or limiting their usage.You could even wake up one morning to realise your lender has reduced the balance of your redraw facility. After all, the funds within a redraw facility are extra repayments that you voluntarily made to your lender - it's not a bank account. This is what happened to customers of ME Bank in 2020 when it made the call to reduce the amount borrowers could redraw if they were deemed at risk of falling behind on their repayments. The change sparked uproar and the bank ultimately reversed its decision, but it likely left many nervous to rely entirely on redraw facilities.