An offset account is a transaction or savings account linked to a loan facility. The balance held in the offset account is subtracted from the loan balance when interest is calculated. A borrower with a $500,000 loan and $50,000 in the offset account pays interest on the net $450,000 balance, while still being able to access the $50,000 as ordinary cash.
For a residential or investment loan, an offset account is one of the most efficient ways to reduce interest cost while keeping cash accessible. The full balance of the offset account reduces interest dollar-for-dollar, but the funds themselves remain in the offset account (not applied to the loan principal), which preserves their nature for tax purposes on investment property.
Offset is distinct from redraw. Offset funds sit in a separate transaction account and never reduce the loan principal; redraw funds have been applied to the loan principal and are accessed by re-borrowing. For most investment property structures, offset is preferred because it preserves the tax-deductible interest position.
Private credit facilities do not typically offer offset; the feature is associated with longer-term bank lending where the borrower wants ongoing liquidity tied to the loan.