Offset Account vs ETFs: Running the Numbers Properly

If you have a home loan and some spare cash, you have probably asked yourself: should this money sit in my offset account, or should I invest it in ETFs? It is one of the most debated questions in Australian personal finance, and most of the arguments compare the wrong numbers.

The fair comparison isn't "my mortgage rate versus the share market's average return". It's a guaranteed, tax-free saving versus an uncertain, taxed return. Once you line those up properly, the answer gets much clearer.

How an offset account works

An offset account is a transaction or savings account linked to your home loan. Your lender subtracts its balance from your loan balance before working out interest.

If you owe $500,000 and have $100,000 in your offset, you pay interest on $400,000. The $100,000 is still your money. You can spend it, move it or withdraw it at any time.

Three things make the offset saving special:

• It is guaranteed. Every dollar saves your full mortgage rate, whatever markets do.
• It is tax-free. You don't earn interest, you avoid paying it, so there is no income to tax.
• It is liquid. The money is available tomorrow if you need it.

That combination is rare. To match it with an investment, you need a return that beats your mortgage rate after tax and after allowing for risk.

What ETFs actually return after tax

A broad ETF such as VAS, VGS or DHHF has returned somewhere around 7% to 10% a year over long periods, though no return is guaranteed and some years are negative. That return comes in two parts:

• Distributions (dividends and other income passed through to you). These are taxed every year at your marginal rate, although Australian shares often come with franking credits that reduce the tax.
• Growth in the unit price. This is only taxed when you sell, as a capital gain.

Here is a simple illustration for someone on a 32% marginal rate (30% plus the 2% Medicare levy). We assume a 7% total return: 3% in distributions and 4% in growth, and we ignore franking to keep it simple.

That 6.04% is before any capital gains tax when you eventually sell. If you sell decades later, some of that growth will be taxed too, which pulls the real long-term figure a little lower.

The break-even return

A useful way to frame it: what pre-tax return would an investment need just to match your offset? If all of the return were taxed at your marginal rate:

In practice, ETFs need a bit less than this because growth is taxed later and franking helps. But the point stands: at a 6% mortgage rate, an ETF needs strong returns just to draw level, and it carries risk the offset doesn't.

A worked example: $100,000 for one year

Say you have $100,000 spare, a 6% variable rate, and a 32% marginal tax rate. Check your own loan rate, as rates differ between lenders and change over time.

Every figure in the table covers a single year. On these numbers, the expected results after that first year are almost identical, but the offset gets there with no risk at all. That is why, when mortgage rates are around 6%, the offset is a very strong default.

The picture changes when rates are lower. At a 3% mortgage rate, the offset saves only $3,000 a year, and the ETF's expected advantage over long periods becomes much larger.

Factors beyond the maths

Risk and sleep

Your offset never has a bad year. ETFs regularly fall 20% or more in a downturn. If a big drop would cause you to sell, the expected ETF return isn't the return you'll actually get. Our guide on investing vs trading covers why staying invested matters so much.

Time horizon

Over one or two years, ETFs are close to a coin toss against a 6% guaranteed saving. Over 15 or 20 years, the odds that a diversified ETF beats a mortgage rate improve, though they are never certain.

Future investment property

If you might rent out your home one day, an offset keeps your options open. Money in the offset hasn't paid down the loan, so the full loan balance can stay tax-deductible once the property is rented. Paying down the loan directly and redrawing later usually doesn't work the same way.

Tax changes ahead

From 1 July 2027, the 50% capital gains tax discount on investments held outside super is being replaced with cost base indexation and a 30% minimum tax on capital gains. That makes future ETF growth outside super slightly less tax-efficient, which nudges the comparison towards the offset. Our article on the 2026 Budget CGT changes runs the numbers.

FIRE goals

If you're aiming to retire early, you need assets that produce income before 60. A paid-off home cuts your living costs, but it doesn't pay the bills by itself. Many people on the FIRE path do both: build their offset to clear the mortgage, then switch everything to ETFs. Our guide on super or ETFs first explains how the outside-super bucket fits in.

A simple way to decide

1. Start with an emergency fund in your offset. Three to six months of expenses, earning your mortgage rate tax-free, is hard to beat.
2. Compare your after-tax numbers. Use the break-even formula with your own mortgage rate and tax rate.
3. Be honest about risk. If a 30% fall would make you sell, lean towards the offset.
4. Think about the future of your home. If you may rent it out, the offset is usually better than extra repayments.
5. Consider a split. You don't have to choose one. Many people put a fixed amount into the offset and invest the rest in a simple, diversified ETF.

Conclusion

The offset versus ETFs debate gets heated because people compare a guaranteed after-tax saving with a hoped-for pre-tax return. When you compare like with like, a high mortgage rate makes the offset a genuinely good investment, while lower rates and longer horizons tip the balance towards ETFs.

Your next step: write down your mortgage rate and marginal tax rate, run the break-even formula, and decide how much certainty you want. Then pick a split you can stick with, and review it whenever rates move by a percentage point or more.