ETF Investing vs Offset Account for Australians: Which Grows Your Money Faster? (+ Calculator)
If you have a home loan and some spare cash each month, you eventually hit the same fork in the road: do I park the money in my offset account, or invest it in ETFs?
Just want to crunch your own numbers? Skip straight to the interactive calculator ↓
Both are good problems to have. Both build wealth. But they build it in very different ways, and the “obvious” answer (“shares return more than a mortgage rate, so invest”) quietly ignores the two things that decide this in practice: tax and risk.
This post breaks down how each option really works, walks through a few concrete examples at different starting points, and finishes with an interactive calculator so you can plug in your own numbers and see the gap over up to 30 years.
Not financial advice. This is general information for an owner-occupier with a home loan. It ignores your personal circumstances. Tax rules, offset mechanics, and product features vary by country and change over time. Talk to a licensed adviser before acting.
TL;DR
Investing a $100,000 lump sum for 20 years in an S&P 500 ETF (IVV’s ~8.5% long-run return) versus parking it in your offset (owner-occupier), after all tax.
By loan rate (at a 39% marginal tax rate):
| Home loan rate | Offset (tax-free) | S&P 500 ETF (after tax) | Winner |
|---|---|---|---|
| 5% (low) | ~$271,000 | ~$384,000 | ETF by ~$113,000 |
| 6.15% (current) | ~$341,000 | ~$384,000 | ETF by ~$43,000 |
| 7% (high) | ~$404,000 | ~$384,000 | Offset by ~$20,000 |
By tax bracket (at a 6.15% loan — the offset is tax-free, so only the ETF moves):
| Marginal tax rate | Offset (tax-free) | S&P 500 ETF (after tax) | Winner |
|---|---|---|---|
| ~0% (sell in retirement)* | ~$341,000 | ~$454,000 | ETF by ~$113,000 |
| 32% (most earners) | ~$341,000 | ~$412,000 | ETF by ~$71,000 |
| 39% (current example) | ~$341,000 | ~$384,000 | ETF by ~$43,000 |
| 47% (top bracket) | ~$341,000 | ~$353,000 | ETF by ~$12,000 |
*Assumes low income across the whole period. Even at a 0% marginal rate the new rules still levy a 30% minimum tax on the capital gain (pensioners and money held inside super are exempt) — so selling in retirement saves less than it used to.
What we make of today’s ~6.15% rates: we’d lean towards the offset — even though it finishes about $43,000 behind the ETF over 20 years (roughly $2k a year). That gap is the only thing the ETF wins, and it isn’t guaranteed: you’d be buying it with two decades of market swings, the risk of being forced to sell in a crash, and the discipline not to panic — a thin, uncertain premium for all that. The offset delivers a near-identical outcome that’s guaranteed, tax-free, zero-risk and fully liquid. Push the loan rate to 7%+ and it wins outright.
But it’s never purely one or the other. The sensible play is to do both — keep a solid offset buffer and invest — and shift the balance with your circumstances: tilt towards investing when your loan rate is low or your tax bracket is low, and towards the offset when your rate is high or you’re a high earner.
The two options in one paragraph each
Offset account. A transaction/savings account linked to your home loan. Every dollar sitting in it is subtracted from your loan balance before interest is charged. Put $50,000 in the offset against a $500,000 loan and you only pay interest on $450,000. You never “earn” interest — you avoid paying it. That avoided interest is your return, it equals your loan rate, and crucially it is completely tax-free. It’s tax-free because you aren’t earning income the tax office can touch — you’re reducing a cost. There’s no gain to declare; you simply lose less. A dollar of interest saved is worth more than a dollar of interest earned, which would be taxed.
ETF investing. You buy units in a diversified, low-cost index fund. Throughout this post the examples use an S&P 500 ETF (e.g. IVV) — 500 of the largest US companies in one holding. Over the long run broad share indices have historically returned more than mortgage rates — but the return is volatile (it can be negative for years), taxed (dividends each year, capital gains when you sell), and while it is liquid, you might be forced to sell at a bad time.
The insight everyone misses: tax-free beats “higher”
Here is the trap. People compare a 6.15% loan rate against an 8.5% expected share return and conclude ETFs win by 2.35%. But those two numbers aren’t the same currency.
The offset return is after-tax. The share return quoted is usually before-tax.
To compare fairly, gross up the offset return to its pre-tax equivalent:
Pre-tax equivalent = loan rate 1 − marginal tax rate
At a 6.15% loan rate and a 39% marginal rate (37% + 2% Medicare):
6.15% 1 − 0.39 = 10.08%
So a guaranteed, risk-free 6.15% in the offset is like earning 10.08% before tax on a fully-taxed investment. Suddenly your 8.5% ETF has to work a lot harder than it looked.
ETFs aren’t fully taxed every year, though — only the dividends are taxed annually, and the growth portion is deferred until you sell. That deferral pulls the real “hurdle rate” back down somewhere between the loan rate and its grossed-up equivalent. The calculator below does this properly so you don’t have to.
Important 2026 change: the 50% CGT discount is being replaced
The old rule of thumb — "hold shares over 12 months and only half your gain is taxed" — is going away. The 2026–27 Federal Budget replaces the 50% CGT discount from 1 July 2027 with cost-base indexation (you're taxed only on the real, above-inflation gain) plus a 30% minimum tax on net capital gains, across all assets including ETFs. For most accumulators this means capital gains are taxed more heavily than under the old half-rate discount — which, all else equal, tilts the scales a little further towards the offset. Gains accrued before 1 July 2027 keep the old discount, super is unaffected, and pensioners are exempt from the minimum tax.
How this post handles it: for simplicity, the examples and the calculator apply the new rules to the entire holding period — including the ~1 year between now and 1 July 2027 that technically still gets the old 50% discount. That understates the ETF's after-tax result very slightly, but keeps the comparison clean and consistent. You can flip the calculator to the old 50% discount to see the other extreme.
The takeaway: the offset’s guaranteed, tax-free return is worth far more than its headline number suggests. The higher your loan rate and the higher your tax bracket, the better the offset looks.
Pros and cons at a glance
| Factor | Offset | ETF |
|---|---|---|
| Expected return | Loan rate, guaranteed | Higher, not guaranteed |
| Tax | Tax-free | Dividends + CGT |
| Risk | Can't lose value | Can fall 30–50% |
| Liquidity | Instant, no market risk | Liquid, but sell at market price |
| Volatility | None | Rides the market |
| Diversification | Not applicable | Broad (index) |
| Upside | Capped at loan balance | Unlimited |
| Behaviour | Set & forget | Needs discipline |
| Best when | High rate / high tax | Low rate / long horizon |
Shaded cell = winner on that row (green = offset, blue = ETF). "Best when" is situational — no single winner.
How the numbers are worked out
The TL;DR table is just three runs of the same calculation. Here it is in full for the 6.15% (current) row — a single $100,000 lump sum over 20 years, against a $1,000,000 mortgage on a 30-year term (a typical Sydney loan), at a 39% marginal tax rate. The S&P 500 ETF returns 8.5% total (1.2% dividends + 7.3% growth) — IVV’s actual annualised return since its 2000 inception, through the dot-com crash and the GFC — taxed under the new post-2027 CGT rules (2.5% inflation indexation + 30% minimum tax). All figures come straight from the calculator’s model below; swap the loan rate to reproduce the other rows.
Picture that $1,000,000 mortgage at 6.15% over a 30-year term, repaying about $6,092/month. Park $100,000 in the offset and keep repaying the same amount.
Why we measure the first 20 years, not the full 30. Keeping repayments level, this offset actually clears the loan early — a few years before the 30-year term is up. Once the loan balance drops below your $100,000, the offset can no longer save interest on the whole amount and the maths gets messy. Across the first 20 years the loan is still ~$545,000 — comfortably above the offset — so everything below is exact.
The offset account itself pays no interest — it just shrinks the balance you’re charged on. Let’s build the benefit up in pieces.
Step ① — the simple interest saved. At 6.15% (0.5125% a month), your $100,000 dodges $512.50 of interest in month one. Ignore compounding for a moment and just add that up over 240 months:
Step ② — interest saved on the extra principal. Here’s the part that’s easy to miss. Because your repayment stays fixed, that saved interest doesn’t sit idle — it pays down extra principal. A smaller balance means even less interest next month, which pays off even more principal, and so on. So beyond the simple $123,000, you save interest on your own savings — the snowball. Adding up what each month’s extra payment saves over its remaining life:
Where the $118,050 snowball comes from — month by month
Each month you pay down a little extra principal (which itself grows, since last month's saving is added on). That extra principal then saves interest at 0.5125%/month for every month left in the term:
| Month t | Extra principal paid 512.50·(1.005125)t−1 | Months left (240−t) | Interest it saves 512.50·(1.005125)t−1·0.005125·(240−t) |
|---|---|---|---|
| 1 | $512.50 | 239 | $627.75 |
| 2 | $515.13 | 238 | $628.33 |
| 3 | $517.77 | 237 | $628.89 |
| ⋮ | ⋮ | ⋮ | ⋮ |
| 238 | $1,721.28 | 2 | $17.64 |
| 239 | $1,730.10 | 1 | $8.87 |
| 240 | $1,738.97 | 0 | $0.00 |
Add up that last column across all 240 months:
Step ③ — add the two together. Simple saving plus the snowball is your total interest saved:
Step ④ — add back your own money. That $100,000 never left — it’s still in the offset, still yours. Add it to the interest saved for your full position:
So you’re $341,050 better off — $241,050 of it pure, tax-free interest saved. Here’s that head-to-head against investing the same $100,000 in an S&P 500 ETF:
| Offset (tax-free) | S&P 500 ETF (after all tax) | |
|---|---|---|
| End value | ~$341,000 | ~$384,000 |
Closer than it looks. The ETF ends ~$43,000 ahead over 20 years — about 13% more, but for two decades of market risk and volatility. Put another way: a guaranteed, tax-free offset at 6.15% nearly keeps pace with the S&P 500’s long-run ~8.5% (its return since 2000, through two crashes). At a higher loan rate or tax bracket that gap closes or flips — as the TL;DR table and the tax section below show.
The full working for the ETF side
The offset was the easy one (above). The ETF needs a single growth rate that folds in price growth, dividends, and the tax on those dividends.
The ETF nets $384,182 after all tax, versus the offset’s $341,050 — ahead by $43,132. The indexed cost base isn’t a tidy formula (each reinvested dividend is indexed from its own month), so that figure comes from the month-by-month run; everything else above is exact.
How your tax rate changes it
The offset’s return is tax-free, so it stays at $341,050 whatever your bracket. The ETF is the opposite — it’s taxed twice (dividends every year, then capital gains on sale), so the higher your marginal rate, the more of that 8.5% you hand back. Same 6.15% loan, same ETF, only the tax bracket changes:
| Marginal tax rate | Offset (tax-free) | S&P 500 ETF (after tax) | ETF’s edge |
|---|---|---|---|
| ~0% (sell in retirement) | ~$341,000 | ~$454,000 | +$113,000 |
| 32% (most earners: $45k–$135k) | ~$341,000 | ~$412,000 | +$71,000 |
| 39% (worked example: $135k–$190k) | ~$341,000 | ~$384,000 | +$43,000 |
| 47% (top bracket: $190k+) | ~$341,000 | ~$353,000 | +$12,000 |
(Rates include the 2% Medicare levy.)
The offset line never moves. The ETF’s lead, though, shrinks sharply as you climb the brackets — from ~$71,000 for a typical earner down to just ~$12,000 at the top rate — purely because a bigger slice of its dividends and capital gains goes to tax. So the higher your income, the less you’re rewarded for taking market risk, and the more attractive the tax-free offset becomes. Push the loan rate up as well (7%+) and, for a top-bracket earner, the offset stops merely closing the gap and starts winning outright.
The top row is the classic strategy: hold the ETF and sell in retirement when your income — and so your tax rate — is low, and the ETF’s edge stretches to ~$113,000. But note the catch under the new rules: the 30% minimum tax on capital gains now applies even in a zero-income year (only pensioners and super escape it), so even at a 0% marginal rate that gain is taxed at 30%. Deferring the sale to a low-income year still helps, just far less than it did under the old 50% discount.
Factors the numbers don’t capture
- The offset is capped. It only saves interest up to your loan balance. Once your offset equals your remaining loan, extra dollars earn nothing — that’s the point to switch to investing.
- Offset loans cost a little more. A loan with a genuine offset account usually carries a slightly higher rate (~0.1–0.2%) than a bare-bones loan without one, and often an annual package fee. That shaves a bit off the offset’s real edge — worth checking the rate premium is smaller than the interest the offset actually saves you.
- Sequence risk. A market crash early in your journey hurts ETFs far more than the same crash late. The offset has none of this.
- Behaviour is a real return. The best strategy is the one you’ll actually stick with. Plenty of people sell ETFs at the bottom; nobody panic-sells an offset.
- Deductibility flips the maths. This post assumes an owner-occupier loan (interest not deductible). For an investment loan the interest is tax-deductible, so offsetting reduces a deduction and the comparison changes.
- Dividend tax nuances. These examples use an S&P 500 (US) ETF, whose ~1.2% yield keeps annual tax drag low but carries ~15% US withholding tax (creditable against your Australian tax with a W-8BEN). Had we used Australian shares instead, franking credits would soften dividend tax further. The calculator uses a plain marginal-rate assumption on dividends, so treat it as a reasonable middle estimate.
- The middle path exists. Many people do both: build the offset to a comfortable emergency buffer first, then invest the surplus. Others use debt recycling to get the best of both — get advice before going there.
Try it yourself: the offset vs ETF calculator
Plug in your own numbers. It simulates month by month: the offset side grows your position at the loan rate, tax-free (that’s the interest you’re not charged, snowballing into principal — not the account earning anything), while the ETF grows on price, pays dividends taxed each year at your marginal rate (net dividends reinvested), and pays capital gains tax on sale. Choose the CGT basis — the new post-2027 rules (inflation-indexed real gain + 30% minimum tax) are the default; you can switch to the old 50% discount to compare.
Offset vs ETF — 30-year projection
ETF total return = growth + dividends = 8.5% p.a. (before tax)
Assumptions & simplifications: Monthly steps. The offset side grows at your loan rate, tax-free — this is the interest you're never charged (which pays down principal faster), not the account earning interest — and it assumes your loan balance always exceeds your offset balance, so every dollar keeps saving interest. The ETF grows on the price component, pays dividends monthly taxed at your marginal rate with net dividends reinvested. CGT at sale depends on the basis you pick: new rules index each parcel's cost base by your inflation figure and tax the real gain at the higher of your marginal rate or 30%; old 50% discount taxes half the nominal gain; no concession taxes the full nominal gain. The whole horizon is modelled under the chosen basis (the ~1-year transition before 1 Jul 2027 is ignored). Franking/US-withholding credits, brokerage, buy/sell spreads, and future changes in tax law are ignored. This is an illustration, not a forecast — real returns are volatile and not guaranteed.
Bottom line
- The offset’s return is guaranteed, risk-free, and tax-free — worth far more than its headline rate. Gross it up by your tax bracket before comparing.
- High loan rate + high tax bracket → the offset is hard to beat. Cheap debt + long horizon + risk tolerance → ETFs tend to win.
- Around today’s rates the two are often close, which is exactly when the offset’s certainty and liquidity tip the scales for many people.
- You don’t have to choose one forever: build a solid offset buffer first, then invest the surplus.
Run your own numbers in the calculator above — and remember the model is an illustration, not a promise. Markets don’t return a smooth 8% every year.
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