Invest vs Offset Calculator

How the comparison works

The calculator gives the same lump sum and the same monthly amount to both options. In the offset, the money reduces the loan balance and the interest saved stays in the offset, so the benefit compounds at the mortgage rate. In the investment, the money grows at the return you enter and is then taxed.

Offset value = amount × (1 + monthly mortgage rate)^months + monthly extra × [((1 + monthly mortgage rate)^months − 1) ÷ monthly mortgage rate].

The investment side uses the same monthly contribution timing, but the annual return is converted to a monthly effective rate. If earnings are taxed as income, the return is reduced by your marginal rate before it compounds. If they are taxed as a capital gain, the full return compounds and the tax is taken out at the end.

This is deliberately a like-for-like comparison of the money, not of your whole financial position. It ignores the loan term, minimum repayments, redraw rules, offset fees, investment fees and the effect of inflation on both sides.

The offset advantage

A mortgage offset account is one of the few genuinely tax-free returns available to most households. If your loan charges 6%, every dollar in the offset saves 6 cents of interest a year. You would need a pre-tax investment return of about 8.8% to match that if your earnings are taxed at 32%, or about 11.3% at a 47% marginal rate.

The offset is also liquid. You can usually withdraw the money, which makes it useful as an emergency buffer and as a place for short-term savings. The trade-off is that the return is capped by the mortgage rate and the money is tied to the property, but the certainty is valuable.

• Guaranteed: the interest saving is known if the rate stays the same and does not depend on markets.
• Tax-free: no tax is paid on avoided interest, so the comparison rate is already after tax.
• Flexible: cash in an offset is normally accessible, subject to the lender’s rules.
• Fee risk: some offset accounts charge a higher rate or an annual package fee, which reduces the benefit.

Tax on investment gains

Interest, unfranked dividends and trust distributions are generally taxed at your marginal rate in the year they are received. That is the “income each year” option. It produces the lowest after-tax result because tax is paid along the way and less money stays invested.

Capital growth is different. You generally pay tax only when you sell, and individuals who hold an asset for more than 12 months can discount the gain by 50%. The “capital gain” option models that: the whole gain compounds until the end, then half of it is taxed at your marginal rate. Australian shares may also pay franked dividends, and franking credits can reduce the tax on those distributions.

The gap between the two options is largest for high-income investors with long horizons, because the capital gains discount and deferral are worth more. It is smallest when the investment produces taxable income every year, such as a high-yield savings account or an unfranked income fund.

The return you would need

The “return to match offset” figure is the pre-tax investment return that produces the same after-tax value as the offset. For income-taxed earnings it is approximately the mortgage rate divided by (1 − marginal tax rate). At a 6% mortgage and a 32% rate, that is 6 ÷ 0.68 = 8.8%.

With the capital gains option the required return is lower, because tax is deferred and discounted, but it is still above the mortgage rate. The exact figure depends on the holding period and on how much of the final value is gain rather than contributed capital.

A required return is not a prediction. If the figure looks achievable, ask whether the extra return compensates for market risk, fees, illiquidity and the chance you need the money during a downturn. If it does not, the offset is the more reliable choice.

To see how borrowings and deductible debt change the picture, try the debt recycling calculator. For a plain projection of investment growth, use the investment calculator.