You're building a home, or you've just moved into one. You've got a mortgage — and, sitting in a savings account somewhere, a chunk of cash. Maybe it's the buffer left over after the deposit. Maybe it's the money you're holding back for landscaping, fencing, and blinds. Maybe it's just your emergency fund.
So you ask the obvious question: should that money go into a term deposit (a "fixed deposit", or FD) to earn interest — or should it sit in an offset account against the home loan?
The honest answer surprises most people. For anyone with a home loan, the offset account almost always wins — and not by a little. The reason isn't the interest rate. It's tax. Here's the maths, with the numbers laid out so you can plug in your own.
First, what each one actually does
An offset account is a regular transaction or savings account linked to your home loan. Whatever sits in it is subtracted from your loan balance before the bank calculates interest. Park $50,000 in the offset on a $600,000 loan and you're only charged interest on $550,000. You haven't "earned" anything — you've avoided an expense. And the ATO doesn't tax money you didn't spend.
A term deposit (FD) is the opposite shape: you lock your cash away for a fixed term and the bank pays you interest. That interest is income — so it's taxed at your marginal rate, the same as your salary.
That single difference — expense you avoid vs. income you earn — is the whole game.
The part nobody mentions: the offset return is tax-free
Say your home loan rate is 6.0% and a 12-month term deposit pays 4.5%. On the headline numbers the gap already favours the offset. But once tax bites the term deposit, it isn't close.
If you earn between $45,000 and $135,000, your marginal rate is 30% plus the 2% Medicare levy — call it 32%. Run $50,000 through both for a single year:
| Where $50,000 sits for 1 year | Headline rate | Tax | In your pocket |
|---|---|---|---|
| Offset account | 6.0% (your loan rate) | $0 — nothing to tax | $3,000 saved |
| Term deposit (FD) | 4.5% | $720 (32% of $2,250) | $1,530 earned |
Same $50,000. The offset puts nearly twice as much in your pocket — $3,000 against $1,530 — before we've even talked about compounding. The term deposit's real, after-tax return is just 3.06%. The offset's is the full 6.0%, because there's no tax to pay on interest you never incurred.
Now stretch it over the life of the loan
A home loan runs 25–30 years. Leave that $50,000 where it is and let the gap compound. The line that matters — the offset's tax-free 6% versus the term deposit's after-tax 3.06% — pulls apart fast.
By the numbers, that same $50,000 quietly works this hard:
| Total saved / earned after… | Offset (6.0%) | Term deposit (3.06% after tax) | Shares/ETF (~7% after tax)* |
|---|---|---|---|
| 10 years | $39,542 | $17,588 | $48,358 |
| 20 years | $110,357 | $41,364 | $143,484 |
| 30 years | $237,175 | $73,502 | $330,613 |
Over the full loan, the offset saves you more than three times what the same money would earn in a term deposit after tax. Identical cash. Identical risk — none. The difference is entirely the tax the term deposit pays and the offset doesn't.
The break-even test: how high would a term deposit have to go?
Here's the cleanest way to see it. For a term deposit to merely match your offset, its before-tax rate has to be high enough that what's left after tax equals your loan rate. The formula is simple:
Break-even rate = your loan rate ÷ (1 − your tax rate)
Run it against a 6.0% loan and the term deposit never gets close:
| Your marginal tax rate (incl. Medicare) | Term deposit rate needed to beat a 6% offset |
|---|---|
| 18% (income $18,201–$45,000) | 7.3% |
| 32% (income $45,001–$135,000) | 8.8% |
| 39% (income $135,001–$190,000) | 9.8% |
| 47% (income $190,001+) | 11.3% |
Term deposits pay around 4.5% right now. On a middle income you'd need one paying 8.8% just to break even with your offset — and the higher your income, the more lopsided it gets. That rate isn't on offer anywhere, and if it were, your loan rate would have climbed too, moving the goalposts with it. The offset wins by design.
"But couldn't I do better in shares or an ETF?"
Fair question — and the dashed line on the graph is the honest answer. Over long stretches, a diversified share portfolio or index ETF has historically returned around 8% a year before tax, and even after tax (helped by the 50% capital gains discount when you hold over a year, plus franking credits) it can edge out a 6% offset. On the chart, shares finish ahead.
But that line hides three things the offset doesn't ask of you:
- Risk. 8% is a long-run average, not a promise. In a bad year shares can fall 20–30%. Your offset never has a bad year — it saves you the loan rate, every day, guaranteed.
- Time. Shares reward money you can leave alone for a decade or more through the dips. Cash you might need next year for a fence, a car, or an emergency doesn't belong there.
- Liquidity. Offset money is in your everyday account — withdraw it any time with no penalty and no tax event. Selling shares can trigger capital gains tax and force you to sell at the worst moment.
The useful way to read the graph: your offset is the risk-free hurdle. It's the tax-free return any investment has to beat after tax and after risk before it's worth choosing instead. A term deposit doesn't clear it. Growth assets can — but only with money you can genuinely afford to leave invested and watch wobble.
When an offset isn't the answer
To keep it honest, the offset only wins if a few things are true:
- You actually have a home loan. No loan, no interest to offset — and then a term deposit or investing is exactly the right conversation.
- Your loan has a genuine offset facility. Some come with a package fee (often ~$400/year). On a decent balance the interest saved dwarfs the fee, but check it's worth it on a small balance.
- A redraw isn't quietly different for you. A redraw can save the same interest, but the money is treated as repaid loan — which matters if you later turn the home into an investment property. An offset keeps your funds as savings and your tax position cleaner. Worth a question to your accountant if that's on the cards.
So where should your cash go?
If you've got a home loan, the simplest version is this: money you might need, and money you want kept safe, belongs in the offset. It out-earns every term deposit and savings account on the market after tax, it carries zero risk, and you can touch it whenever you like. A term deposit only makes sense if you don't have a loan to offset against.
Money you're certain you won't touch for ten-plus years, and whose ups and downs won't keep you up at night, is the only money with a real case for shares or an ETF — and plenty of homeowners do both: a healthy buffer in the offset, surplus invested for growth.
This is general information, not financial advice — your rate, your tax, and your plans are specific to you, so run your own numbers and talk to a licensed adviser or your accountant before you move money.
One more place to make your money work harder
The same instinct that makes an offset smart — don't pay for what you don't have to — applies before the loan even starts. The biggest savings in a new build come from choosing a design that genuinely fits your block, so you're not paying to redraw plans or discovering too late that it won't work. Enter your block dimensions into AptSide and see every compatible design from Victorian builders, free, before you commit a dollar.