If you’ve got money sitting in your offset account, should you leave it there or invest it in ETFs? Leaving it in the offset feels like the responsible choice: you save interest and pay your home off sooner. But could investing leave you noticeably wealthier in 10 or 20 years?
On paper the maths looks simple. If your mortgage costs 6% and shares might return 9%, ETFs win. But those two numbers leave out details that can change the answer. Below I work through what you give up when you invest, a 20-year example using historical returns, and which one actually wins after tax. Each button jumps the video to that part.
In our 20-year example, international shares finished ahead of the offset after tax and fees, while Australian shares finished about level with it at a 39% tax rate and behind it at 47%. With a higher mortgage rate the offset did even better. An offset gives a certain, tax-free saving; ETFs can build more wealth over the long term, but only if the extra return is worth the extra risk.
1. What your offset is actually doing
We’re talking about a 100% offset on the mortgage for the home you live in, where the interest isn’t tax-deductible. Say you owe $600,000 and have $100,000 in the offset. You’re only charged interest on $500,000.
Your cash stays accessible, and if you keep making the same repayments, more of each one goes to paying down the loan, so you pay it off sooner. Take that $100,000 out to invest and you give up that saving. The investment has to earn enough to make up for it.
2. What does your ETF actually need to beat?
Mortgage interest is paid with money you’ve already paid tax on. At an example marginal tax rate of 39% (including the Medicare levy), you’d need to earn about $9,836 before tax to have $6,000 left. So saving 6% in your offset is like earning about 9.84% on an investment whose whole return is taxed each year. That’s what people mean when they “gross up” the cost of non-deductible debt.
But 9.84% isn’t automatically the hurdle every ETF has to clear. Distributions and capital growth are taxed differently, and Australian share distributions can come with franking credits. The fair comparison is what the investment leaves you after tax and costs against the interest you avoid.
3. A 20-year example
Imagine you had $100,000 in July 2006. Were you better off leaving it in the offset, or investing in Australian or international shares? We assumed a $1 million mortgage with 30 years left, the same repayments either way and no difference in loan fees.
Using historical RBA mortgage rates, the offset produced a total benefit of about $310,000: your original $100,000 plus about $210,000 less mortgage debt, because the same repayments cleared more of the loan and saved more interest along the way. Before tax and costs, international shares are comfortably ahead, Australian shares are second and the offset is last. But the comparison isn’t finished yet.
4. What happens after tax
For the tax calculation we smoothed those returns into the same percentage each year and used some modelling assumptions (not the actual distribution history):
- Australian shares pay 4% a year in distributions, 70% franked at the 30% company tax rate.
- International shares pay 2.5% a year, with no foreign tax credits added.
- 0.2% a year in fees, after-tax income reinvested, and capital gains tax on a sale in June 2026, including the 50% CGT discount.
At a 39% tax rate, Australian shares finished at about $309,000 against $310,000 for the offset. The roughly $90,000 head start before tax has disappeared: under these assumptions they’re effectively level. International shares finished at about $403,000, still around $93,000 ahead. At 47%, Australian shares fell about $29,000 behind the offset, while international shares stayed about $66,000 ahead.
So tax completely changed the result for Australian shares, while international shares stayed ahead in both scenarios. That’s one reason a global core, such as VGS, BGBL or IVV, alongside Australian shares such as VAS or A200, matters for most ETF portfolios. More on that in building a VAS and VGS portfolio.
5. Your mortgage rate can change the winner
Our offset result used the RBA’s discounted variable mortgage benchmark. Use the higher standard variable benchmark over the same period and the offset benefit rises from about $310,000 to $373,000. Against our 47% tax scenario, the offset then finishes about $92,000 ahead of Australian shares and almost level with international shares.
That’s why someone paying a higher mortgage rate can reasonably reach a different decision from someone with a cheaper loan, even when they’re looking at the same investments.
Could you beat these results by picking better-performing ETFs? Possibly, but picking winners in advance, consistently, is much harder than it sounds. Broad market averages are a more sensible starting point.
6. Where the investment money comes from
People sometimes describe taking money out of an offset as “redrawing from the mortgage”. They’re different things. An offset holds your cash. Taking it out doesn’t change what the original home loan was used for, so if the loan bought your home, buying ETFs with your offset savings doesn’t make that mortgage interest deductible.
A separate investment loan secured against your home’s equity, or redrawing past loan repayments, and using that borrowed money directly to buy income-producing investments is different. Interest on that borrowing may be deductible, because of what the borrowed money is used for. Having your house as security doesn’t make interest deductible by itself; the purpose of the borrowing does.
That’s the distinction behind “bad debt” and “good debt”: non-deductible private debt versus potentially deductible investment debt. Good debt doesn’t guarantee a good investment; it describes a tax difference. Keeping investment borrowing separate from private spending also makes it easier to trace. Mix them and the interest may need to be split between the two.
7. What deductible interest does to the numbers
Say you borrow $100,000 to invest at 6.5%, a little higher than our mortgage rate, because investment loans can cost more than owner-occupied ones.
Both sides of the comparison have to be after tax. You can’t compare a 3.97% after-tax interest cost with a 9% return before tax. When the investment income and the interest deduction are taxed the same way, comparing the rates before tax also works: here 8% beats the 6.5% borrowing rate. That’s why the loan rate can be a useful starting hurdle, though real ETF returns still need their tax components and timing worked through.
And the deduction doesn’t remove the debt. If your $100,000 investment falls to $70,000, you still owe the full loan and must keep making repayments. If your home secures the borrowing, it’s at risk if you can’t repay. And a rising ETF price doesn’t automatically give you cash for those repayments. Get the loan structure and deductibility checked before using a borrowing or redraw strategy.
8. So which one wins?
In our example, international shares came out ahead after tax and fees, while Australian shares were roughly level with the offset or behind it, depending on your tax rate. With a higher mortgage rate the offset became even more competitive.
Many people do a bit of both: keep an emergency buffer in the offset and invest regularly in a diversified core. More in core and satellite investing, how to buy your first ETF and ETFs vs property.
Get your free portfolio report →
Watch the full video on YouTube →
General information only. It doesn’t consider your objectives, financial situation or needs, and it isn’t tax or credit advice. The figures are estimates built on stated assumptions; actual returns, rates and tax will differ. ETFs named are examples, not recommendations. Past performance is not a reliable indicator of future performance. Speak to a tax adviser and your lender before changing how your loan or investments are structured.
Frequently asked questions
Is it better to keep money in an offset account or invest in ETFs?
It depends on your mortgage rate, your tax rate, how long you’ll invest and how much risk you can take. In our 20-year example, international shares finished ahead of the offset after tax and fees, while Australian shares were about level at a 39% tax rate and behind at 47%. The offset gives a certain, tax-free saving; ETFs can grow more but can also fall.
What return do I need to beat my offset account?
As a rough guide, divide your mortgage rate by (1 minus your marginal tax rate). At a 6% mortgage rate and a 39% tax rate, that’s about 9.84% for an investment whose whole return is taxed each year. Because ETF returns include lightly taxed capital growth and sometimes franking credits, the real hurdle can be lower.
Is money in an offset account taxed?
No. Money in an offset doesn’t earn interest, it reduces the interest you’re charged, so there’s no income to tax. That’s why a 6% saving is worth more than a 6% taxable return.
If I take money out of my offset to buy ETFs, is the mortgage interest tax-deductible?
No. Offset money is your own cash, and taking it out doesn’t change what the home loan was used for. If the loan bought your home, the interest stays non-deductible. Interest on a separate loan used directly to buy income-producing investments may be deductible.
Is borrowing against my home to invest in ETFs a good idea?
It can increase returns but also losses. The interest may be deductible, but you still owe the loan if your investments fall, and your home is at risk if you can’t repay. Have the loan structure and tax treatment checked before you start.
Does the change to capital gains tax affect this?
Yes. This example uses the rules for a sale in June 2026, with the 50% CGT discount. Legislation that has passed replaces the discount with indexation from 1 July 2027, so a new investment would need to be modelled under the new rules.