If you’ve got $100,000 sitting in your mortgage offset, you might wonder whether it could be working harder somewhere else.
A high-interest savings account might be paying 5% or 6%. Shares could deliver a higher return over the long term. And if you’ve heard about debt recycling, you might be wondering whether that’s an even better way to use the money.
But comparing the headline rates can be misleading. If your mortgage rate is 6%, keeping $100,000 in your offset could save you about $6,000 in interest over a year. That saving isn’t taxed. Put the same money in a savings account and the interest you earn generally is.
Invest the money and the comparison gets harder again: returns aren’t guaranteed, and you’ll need to account for tax, fees and the possibility of losses.
So before moving money out of your offset, it’s worth asking: what would it actually need to earn elsewhere to make the move worthwhile?
Start with your mortgage rate
An offset account reduces the amount of your mortgage on which interest is calculated.
Say you have a $500,000 mortgage and $100,000 in a 100% offset. You generally pay interest on $400,000 rather than $500,000. If your mortgage interest rate is 6%, that $100,000 saves roughly $6,000 in interest over a year, assuming it stays in the offset.
You’re not receiving $6,000 as income, but avoiding $6,000 of interest. For an owner-occupied mortgage, that’s important because the saving isn’t taxable in the way interest from a savings account generally is. That makes your mortgage rate a useful benchmark when deciding what to do with spare cash.
Just remember that offset accounts can come with package fees or a higher mortgage rate, so those costs need to be included in a proper comparison.
A savings account has to beat the mortgage rate
Now say you take the $100,000 out of the offset and put it in a savings account paying 6%. It looks like you’ve matched your mortgage rate, but the $6,000 you earn in savings interest is generally taxable.
Assume a 37% marginal tax rate and, for simplicity, no Medicare levy or fees. Your $6,000 interest income would leave you with $3,780 after tax. To end up with the same $6,000 benefit as the offset, you’d need a savings rate of about 9.52%.
The simplified calculation is: Required savings rate = mortgage rate ÷ (1 − marginal tax rate)
So, in this hypothetical: 6% ÷ (1 − 37%) = 9.52%
| Option | Rate | Gross benefit | Illustrative tax | Net benefit |
| 100% offset | 6.00% | $6,000 | $0 | $6,000 |
| Savings account | 6.00% | $6,000 | $2,220 | $3,780 |
| Savings account break-even | 9.52% | $9,524 | $3,524 | $6,000 |
This is why looking at the advertised rate alone can give you the wrong impression.
It doesn’t mean you should never use a savings account. You might not have an eligible offset, or you might want to keep some cash separate from your mortgage. But if you’re deciding between the two, compare what you’ll actually have left after tax, rather than the two headline rates.
Shares are a different proposition
What if you’d rather invest the $100,000?
This is where you can’t simply calculate a break-even rate and call it done. Shares and ETFs can generate returns through dividends, distributions and capital growth. There may also be franking credits, foreign income, currency movements, investment fees and brokerage to consider.
And unlike the interest saving from your offset, the return isn’t guaranteed. If your mortgage rate is 6%, an investment expected to return 6.5% isn’t necessarily enough to make the trade-off worthwhile. Your investment could return 15%, but it could also fall 20%.
That doesn’t mean investing is a bad idea. If you’re investing for the long term, you may be comfortable accepting that volatility in exchange for the potential for higher returns. But you need to compare an expected investment return with a relatively certain mortgage saving. The extra return you’re looking for is effectively compensation for taking on that risk.
Your time frame matters here, too. Someone investing for 15 or 20 years may be comfortable with market falls that would be a problem for someone who expects to need the money next year.
Tax makes the investment comparison more complicated
You also can’t assume that a 7% investment return means you’ve earned 7% in the same way as a 7% mortgage saving.
Dividends and fund distributions are generally taxed as they arise, while capital growth generally isn’t taxed until you sell or another CGT event occurs. Investment fees and brokerage reduce your return as well. So if you’re comparing an investment with your offset, look at the return you actually expect to keep after costs and tax and consider when that tax will be paid.
It’s also worth running a few different scenarios rather than relying on one assumed return. What happens if the market falls 25% in the first year? What if your mortgage rate rises? What if you need the money while your portfolio is down?
Those scenarios can matter more than whether your spreadsheet says the investment should return 6.5% or 7%.
Then there’s debt recycling
Debt recycling is often brought into this conversation, but it’s really a separate question. First you decide that you want to invest. Then you can consider whether there’s a more tax-effective way to structure the borrowing.
Say you have $100,000 in your offset and decide to invest it. If you simply move the money from your offset into your brokerage account, your offset falls by $100,000. More of your home loan is now subject to interest, and the interest on that owner-occupied borrowing would ordinarily remain private and non-deductible.
With an appropriately structured debt-recycling strategy, you could instead pay the $100,000 into a loan split and then borrow that amount to invest in assets expected to produce assessable income. The investment and debt position may look broadly similar, but the purpose of the borrowing has changed.
Depending on the circumstances, the interest on the investment-related borrowing may be deductible. The ATO says interest on money borrowed to buy shares may be deductible where assessable dividends are reasonably expected. Its ruling TR 2000/2 also explains how redraws are treated and how mixed private and income-producing borrowing may need to be apportioned.
Debt recycling doesn’t make the investment itself perform better. It potentially changes the after-tax cost of the borrowing. It also means taking on debt to invest, so the risks and record-keeping requirements need to be considered carefully.
So what should you compare?
If you’re trying to decide what to do with spare cash, start with the actual numbers:
- Your mortgage rate
- The savings rate after any bonus conditions
- Offset fees or loan-rate premiums
- Your marginal tax rate
- Investment fees and brokerage
- Tax on dividends and distributions
- The timing of capital gains
- Different investment-return scenarios
- How much cash you might need in the short term
- Possible changes in mortgage rates
- Any interest costs and potential tax deductions under a borrowing strategy
The biggest trap is treating all returns as though they’re the same. A dollar of mortgage interest you don’t have to pay is different from a dollar of taxable savings interest. And both are different from a dollar of sharemarket gains that may or may not materialise.
What return do you really need?
That’s ultimately what this comparison is trying to work out. If your mortgage rate is 6%, keeping money in your offset is saving you roughly 6% on that money, before taking account of any offset-related fees.
A savings account needs to beat that after tax. An investment needs to offer enough expected return to make taking on market risk, tax and fees worthwhile. And if you’re considering debt recycling, the potential tax benefit needs to be weighed against the cost and risks of borrowing to invest.
There isn’t a single answer that works for everyone. The useful part is knowing the number you’re trying to beat before you move the money.
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This article contains general information only and does not constitute personal financial or tax advice. The calculations are simplified illustrations and do not account for every tax, product or lending feature. Consider speaking with a licensed financial adviser, registered tax agent and lending professional before changing how you hold cash, invest or structure debt.
