Offset or Revolving Credit? The One Choice That Could Save (or Waste) You Thousands

Shane Passfield-Bagley
4 days ago
6 min read

Offset mortgages and revolving credit loans get talked about as if they are basically the same thing. In reality they behave quite differently, and those differences can have a big impact on your cashflow, your day-to-day banking, and even your tax position if you are an investor.

Below is a plain-language walk-through of how each one works, and the key differences to think about when you are choosing between them.

How each structure works

Offset mortgage – link your savings, reduce the interest

An offset mortgage links your home loan to one or more everyday or savings accounts:

Your money stays in those accounts as normal
The bank looks at your loan balance, then subtracts the total of the linked accounts
You only pay interest on the difference

Example:

Home loan: $500,000
Linked accounts: $40,000
You are charged interest as if the loan is $460,000

Your repayments are usually set up like a normal table loan on principal and interest. Because you pay interest on a reduced balance, more of each repayment goes to principal, so you clear the loan faster.

Revolving credit – a giant overdraft secured by your home

A revolving credit is more like a big overdraft sitting against your home.

You get a transactional banking account with an overdraft limit, for example $50,000
Your income or savings is paid into that account
You pay interest on the daily balance of that account

There are two common types:

On-call facilities
- Naturally an "interest-only" loan
- No fixed term or required principal reduction
Reducing facilities
- Set up so the limit or a fixed principal amount reduces over time
- Feels more like a structured loan, but with flexibility to redraw
- Can be interest-only for a period of time, but requires bank assessment

Due to the nature of these accounts and the ability to attach an eftpos or debit card, borrowers will often set these up as their main account, with income being deposited and bills coming out. This maximises the interest savings, but does require somewhat strict account management.

Cashflow and how the repayments feel

Offset: fixed repayments, heavier cashflow, faster progress

On principal and interest:

Your repayments are calculated as a standard table loan on a floating/variable interest rate
They usually do not drop just because you have more money in offset accounts
Instead, more of each repayment goes to principal, which shortens your loan term and reduces total interest over time

As a result, this can feel heavier on cashflow than a flexible revolving credit, because you are committing to that steady principal reduction.

On an interest-only offset, this difference disappears, because you are not paying scheduled principal anyway. Effectively, a fully offset account would have zero repayments, much like an interest-only or "on call" Revolving credit.

Revolving credit: flexible cashflow, high discipline required

With an on-call revolving credit:

There is usually no set principal repayment required
You must cover the interest and any fees, the rest is up to you
In good months you can smash the balance down
In tight months it can creep back up

Reducing revolving facilities add more structure, but you still have the ability to redraw up to the limit.

This flexibility is great if you drive it on purpose. It is dangerous if you treat it like free money. We highly recommend having a plan in place when using these facilities, along with an appropriate limit.

LVR rules and size limits

In practice, the bank’s rules can heavily influence what is possible.

High LVR restrictions
- At high LVRs (small deposits), most banks restrict or completely remove the option of a revolving credit

Maximum facility limits
- Even at comfortable LVRs, banks often cap the size of a revolving credit
- This might be a dollar cap or a percentage of your total lending/property value

Offset structures can also have their own rules, but revolving credit is usually more tightly controlled because of the flexibility and perceived risk.

In reality, many people end up with:

A core home loan on fixed or floating table rates
A smaller revolving credit or offset portion on the side

Fees, rates and cash-backs

Fees and pricing

Some revolving credits incur a monthly account fee
Interest rates on revolving credit and offset facilities are often marginally higher than standard floating/variable rates, but this is not always the case and varies by lender

When comparing, look at:

The rate
Any ongoing fees
How much balance you realistically expect to hold in the facility, or
How long it will take you to save the amount required to offset the facility

Cash-backs on offset lending

A big one that often gets missed:

Some banks do not pay a cash-back on lending put into an offset structure
Others may offer a smaller cash-back than on standard or revolving lending

That can mean:

Hundreds or even thousands of dollars less at settlement if a decent chunk of your lending is set up in offset

There is a trade-off between:

A one-off lump sum now, and
Ongoing interest savings from an offset over time

You want to compare both sides of that equation, not just chase the biggest cash-back or the fanciest structure on paper.

Tax treatment for investment lending

This is general information only. Tax rules can change, and you should always talk to a tax adviser for your own situation.

The key idea is that tax rules usually care about what the money is used for, not just what product it sits in.

Revolving credit on investment property
- If you use the same revolving account for rental expenses and personal spending, it becomes a mixed-use facility. That may lead to tougher or more complex tax treatment, and more record-keeping
- Additionally, placing a lump sum of personal savings into an investment revolving credit could "re-purpose" the facility, potentially resulting in the loss of tax deductibility on future interest charges.

Offset on investment property
- An offset can sometimes make it easier to keep the borrowing purpose clean
- Your investment loan can stay in a separate loan account, while your savings sit in offset accounts alongside it

The right structure for investors is very case-by-case, and should be designed with both lending and tax advice.

Risk profile: especially for on-call revolving credits

On-call revolving credits naturally carry more risk:

No fixed repayment term
No built-in finish line
As long as you meet interest and stay under the limit, the balance can hang around for years

These facilities should be used with:

A strong, written repayment strategy
Regular check-ins so the balance is actually trending down
A plan for what happens if your income drops or rates rise

Reducing revolving credits and offsets with table repayments tend to give more structure, which many people find safer.

Advanced strategies and flexibility

Revolving credit plus credit card

Some financially savvy clients:

Run all income and bills through a revolving credit, and
Put everyday spending on a credit card with interest-free days, then
Pay the card off in full each month from the revolving credit

Done perfectly, this keeps your money in the revolving account for longer and uses the credit card's interest-free period to reduce your average daily balance.

However:

It requires very strong money management
One missed payment or a growing card balance can wipe out any benefit very quickly

This strategy is not for beginners.

A flexible alternative to cranking repayments

Both offset and revolving credit can be a great alternative to simply locking in higher repayments:

You keep minimum repayments at a comfortable level
You park surplus cash into the flexible facility to cut interest
You keep a cash buffer available if your situation changes

The key is sizing the limit correctly:

Big enough to be useful
Not so big that it tempts overspending or lets the debt drift

We often recommend setting a ~12 month savings goal, and reviewing this on an annual basis or as needed.

The advantage of this strategy lies in its flexibility. It eliminates the necessity of committing to higher repayments and guarantees a cash reserve is available in case of emergencies. I refer to this as a "happy middle ground" between raising repayments and growing your savings.

So which one is right for you?

Offset might suit you if you:

like using multiple accounts and “buckets” to manage your money
want clear structure with regular principal reduction
are an investor wanting to keep borrowing purposes cleaner for tax reasons

Revolving credit might suit you if you:

are very confident with budgeting and self-control
have variable income and want maximum flexibility
want a single, simple place where every spare dollar automatically cuts interest
are prepared to commit to a clear repayment plan, especially with on-call facilities

In many cases, the best result comes from a mix: some fixed, some flexible, and a structure that matches how you actually live and spend.

If you are deciding between the two, it is worth mapping out:

Your income and spending habits
How much cash buffer you want
Your comfort with floating-rate risk and discipline

Then work with a mortgage adviser, and a tax adviser if you own or plan to own investment property, to build a structure that makes both the numbers and the real-world behaviour line up.