When it comes to paying off your mortgage faster and saving on interest, two strategies stand out: using an offset account or making extra repayments. Both can help reduce your overall loan costs, but they work in very different ways—and choosing the right one can make a significant difference to your long-term financial outcome.
Whether you’re looking for flexibility, aiming to eliminate debt faster, or considering tax implications, it’s essential to understand how each approach works. With the help of a mortgage calculator, you can run the numbers on both and choose the option—or combination—that aligns best with your goals.
In this guide, we’ll walk through:
- How offset accounts and extra repayments reduce interest
- How to compare them using a home loan calculator
- Tax and investment property considerations
- When to use one strategy over the other—or combine both
Offset Account vs Extra Repayments: What’s the Difference?
How an Offset Account Works
An offset account is a transaction account linked to your home loan. The balance in this account offsets the principal of your loan when calculating interest.
Example:
- Loan balance: $500,000
- Offset account balance: $50,000
- Interest is only charged on $450,000
Because your interest is calculated daily, every dollar sitting in your offset account works to reduce interest immediately. The big advantage here is flexibility—you can still access the money if needed.
How Extra Repayments Work
Extra repayments involve contributing more than your minimum required repayment. These funds go directly toward reducing your loan principal.
Example:
- Loan balance: $500,000
- Interest rate: 6%
- You pay an additional $500 per month
That extra $500 goes straight to reducing your loan balance, lowering the amount of interest charged going forward. However, once the money is in the loan, you generally can’t access it again unless your loan includes a redraw facility.
Using a Mortgage Calculator to Compare Savings
The best way to see which option saves more is by using a mortgage calculator. This tool helps you simulate the long-term effect of both strategies on your:
- Total interest payable
- Loan term
- Monthly repayment obligations
Scenario 1: Offset Account
- Loan amount: $500,000
- Interest rate: 6%
- Loan term: 30 years
- Offset account balance: $50,000
Estimated result:
- Interest saved: ~$150,000
- Loan term reduced by ~5 years
Scenario 2: Extra Repayments
- Loan amount: $500,000
- Interest rate: 6%
- Loan term: 30 years
- Extra repayment: $500/month
Estimated result:
- Interest saved: ~$170,000
- Loan term reduced by ~6–7 years
Key takeaway:
Extra repayments typically save more over the life of the loan. But an offset account gives you flexibility—and that can be worth a lot depending on your financial situation.
Tax and Investment Property Considerations
Offset Accounts Are More Tax-Efficient
The interest savings from using an offset account are not considered taxable income. That means you get the benefit of reduced interest without increasing your taxable income.
Extra Repayments and Tax Deductions
Extra repayments on your principal residence have no tax implications. But when it comes to investment properties, extra repayments can reduce your tax-deductible interest, which might not be ideal.
Why investors often prefer offset accounts:
- You preserve the full loan balance (and associated tax deduction)
- You can access the money later if needed for other investments
- You reduce interest without affecting tax efficiency
Tip: If you plan to turn your current home into a rental later, keeping funds in an offset account (rather than making extra repayments) is often the smarter tax move.
When to Use Each Strategy
When to Use an Offset Account
- You want to reduce interest but still need access to funds
- You’re building a savings buffer or planning for future expenses
- You have an investment loan and want to preserve tax-deductible debt
- You prefer flexibility over locking money into your mortgage
When to Make Extra Repayments
- Your goal is to pay off the mortgage as quickly as possible
- You don’t need short-term access to the extra funds
- Your home loan allows additional repayments without penalty
- You’re not concerned about offset features or investment strategies
Combining Both for Maximum Impact
You don’t have to choose just one. Many borrowers use a hybrid strategy to get the best of both worlds.
Example Hybrid Strategy
- Loan: $500,000
- Offset account: $30,000 (for emergencies and liquidity)
- Extra repayment: $300/month
Result:
- Immediate interest reduction from the offset balance
- Long-term loan reduction from the monthly extra payments
- Flexibility to access offset funds if needed
Estimated outcome:
- Loan term reduced by 5+ years
- Interest savings of well over $150,000
This strategy provides a strong balance between flexibility and debt reduction.
Key Differences Summary
| Feature | Offset Account | Extra Repayments |
| Interest Savings | Yes | Yes |
| Access to Funds | Yes (anytime) | No (unless redraw available) |
| Tax Efficiency (Investment Loans) | High (maintains deductible debt) | Low (reduces deductible debt) |
| Impact on Loan Principal | Indirect (reduces interest calculation) | Direct (lowers loan balance) |
| Flexibility | High | Low to medium |
| Loan Term Reduction | Yes (if used consistently) | Yes |
Final Thoughts: Which Strategy Wins?
When it comes to offset account vs extra repayments, the “right” choice depends on your goals.
- Extra repayments save more over the long term—but you lose access to the funds unless a redraw facility is included.
- Offset accounts provide flexibility while still significantly reducing interest—especially useful for investors and those who may need access to cash.
- Combining both is often the smartest option, offering the best mix of savings, tax efficiency, and financial control.
Want to See What Works Best for You?
Use a mortgage calculator to model different scenarios based on your loan, interest rate, and available funds. By testing offset savings versus extra repayments, you can choose the strategy—or combination—that helps you save more and reach your financial goals faster.