Short answer: Usually, yes. Money sitting in an offset account linked to a variable home loan reduces the balance your interest is calculated on, and most lenders work that out daily. But it only works if the offset is linked to the right loan split, that split is variable, and the split's balance is at least as big as what you're parking against it.
When I was at CBA, bonus season meant the same conversation around the office every year: "Just chuck it in the offset." Good instinct. The catch is that plenty of people never check the offset is set up to do what they think it's doing. Here's how to check yours.
How does an offset account reduce interest?
An offset account is a transaction account linked to your home loan. Each day, your lender takes your loan balance, subtracts the offset balance, and charges interest on what's left. Interest is usually calculated daily and charged monthly.
So your bonus doesn't earn interest in the offset. It stops you being charged interest on the same amount of your loan. And because it's not interest earned, it generally isn't treated as income the way savings account interest is.
Example (round numbers, assumed variable rate of 6% p.a.): You owe $600,000 and drop a $40,000 bonus into a linked 100% offset. You're now charged interest on $560,000. That's roughly $2,400 less interest over a year, or about $6.50 a day, for as long as the money stays put. Your actual saving depends on your rate, your lender's method and how long the money sits there.
The money is still yours to use. Pull it out and the saving stops from that day.
Is your offset linked to the right loan split?
This is where I see bonus money quietly underperform.
Many Sydney professionals have their loan in splits: a fixed portion and a variable portion, or several splits set up over time from refinancing, top-ups or a renovation. An offset is linked to a specific split, not the loan as a whole.
Things that go wrong:
- Linked to a small split. If your offset holds $80,000 but the linked split only has $50,000 owing, the extra $30,000 is doing nothing for you. An offset can only reduce the linked balance to zero.
- Linked to the fixed split. Fixed splits usually can't have a full offset. Some lenders allow no offset at all on fixed, some allow a partial or capped one. If your offset was attached to a split that has since rolled onto a fixed rate, the benefit may have shrunk or disappeared.
- An old split you forgot about. After a refinance, the offset you use every day may not be the one linked where you think.
- It's not actually an offset. Some accounts at the same lender look like an offset in the app but are just an ordinary savings or transaction account.
Offset or redraw: where should a bonus go?
Both can reduce interest by about the same amount. The difference is access and flexibility.
Offset: your money sits in a separate account. You can spend it with a card, transfer it instantly and keep it clearly separate from the loan.
Redraw: you pay the bonus straight into the loan as an extra repayment. Interest drops the same way, but getting the money back depends on your loan terms. Some lenders set minimum redraw amounts, charge fees, delay access or limit how much you can take out. Lenders can also change redraw terms.
There's also a longer-term angle. If there's any chance your home becomes an investment property later, paying money into the loan and then redrawing it can muddy what the borrowed money was used for, which can affect what interest is deductible. Money in an offset generally keeps that cleaner. This is a question for your accountant, not a reason to panic, but it's worth asking before you choose.
Redraw can suit people who want a bit of friction between them and the cash. Offset suits people who want the money to stay theirs, at arm's length from the debt.
When does an offset help, and when doesn't it?
When it helps:
- The offset is linked to a variable split with a balance at least as big as your offset balance.
- The money is likely to sit there for months, not days.
- You want access to the cash for a buffer, a tax bill or a future plan.
- You'd otherwise leave the bonus in a savings account earning taxable interest at a lower rate than your home loan.
When it doesn't:
- The offset is linked to a fixed split with no or limited offset.
- The linked split is smaller than the cash in the offset.
- Your offset balance is usually low and you're paying a package fee or higher rate for the feature.
- The money is earmarked for something within days, where the saving is small anyway.
Should you keep a buffer?
Yes. I'd rather see a bonus sitting in a linked offset than poured into the loan and locked behind redraw rules. An offset lets you reduce interest and keep a buffer at the same time. That matters if your income has a large variable component, because bonuses aren't guaranteed from year to year.
A sensible buffer is personal. Think about a few months of essential spending, any known bills coming up, and what you'd need if next year's bonus came in smaller.
Buying your first home with your bonus?
If your bonus is going towards a deposit, you won't have an offset yet, and this is the best time to get the setup right. Ask whether the loan you're looking at comes with a full offset on the variable split, how splits would work if you fix part of it, and what the offset costs. Some first home buyers keep part of their savings back as a buffer and put it straight into the offset at settlement, rather than using every dollar on the deposit. Whether that suits you depends on your deposit, LMI and the scheme you're using, so it's worth talking through before you commit.
What about tax time?
Keep this general and check with your accountant. Tax is withheld from bonuses, but what's withheld won't always match your final bill, especially if you have other income or deductions. If you think you might owe something at tax time, an offset is a handy place to hold that money: it reduces interest while it waits, and it's there when the bill arrives. Just don't treat the whole balance as spare.
How do you check your offset is working?
Five quick steps with your bank, by app, statement or phone:
- Confirm which split the offset is linked to. Ask for the loan account number it offsets.
- Confirm that split is variable and check whether the offset is full (100%) or partial.
- Compare balances. Is the linked split's balance bigger than your offset balance? If not, ask about relinking or restructuring.
- Check fees and rate. Are you paying a package fee or a higher rate for the offset, and is your balance big enough to justify it?
- Look at the interest line on your statement before and after the bonus lands. It should drop.
If your splits are messy after years of changes, it can be worth restructuring them. That's something a broker can help you look at.
FAQ
Does an offset reduce interest on a fixed rate loan? Usually not fully. Many fixed splits have no offset, and some allow a partial or capped offset. Check your loan terms.
Can I have more than one offset account? Some lenders allow several offset accounts linked to one split. Others limit it. Ask your lender how it works on your loan.
Is it better to put my bonus in the offset or pay it off the loan? The interest saving is similar. Offset keeps the money easier to access and separate from the loan. Redraw access depends on your loan terms.
Is the interest I save in an offset taxed? Generally, interest saved isn't treated as income, unlike interest earned in a savings account. Check with your accountant for your situation.
What happens if my offset has more money than my loan split? The extra doesn't reduce any more interest. You may need to relink the offset or restructure your splits.
I'm buying my first home. Should I get an offset? If you'll keep savings or a buffer after settlement, usually yes, as long as it's linked to a variable split and the cost is worth it for your balance. It's easier to set up properly at the start than to fix later.
Want a second set of eyes on your offset?
If your bonus has landed, or is about to, and you're not sure your offset and splits are set up to make it work, book a call. I'll walk through how your loan is structured and whether there's a better setup worth looking at.
This is general information only and doesn't consider your personal circumstances. Speak to a broker, your lender or a tax professional for advice on your situation. Loan features and approval depend on lender criteria.