Offset Account vs ETF in Australia: Which Wins After Tax?

You have spare cash and a mortgage. Park it in the offset account for a guaranteed, tax-free saving, or buy ETFs and hope for more? Most answers to this question skip the step that actually settles it: putting both options on the same after-tax footing. This page does that, using 2026–27 tax rates.

Australian context · 2026–27 tax rates · Last reviewed 5 October 2026

The core difference in one paragraph

An offset account produces a certain, tax-free return exactly equal to your mortgage rate. You are not earning income; you are avoiding an expense, and the ATO does not tax avoided expenses on an owner-occupied loan. An ETF produces an uncertain return in two parts: dividends taxed every year at your marginal rate, and capital growth that is not taxed until you sell — currently with a 50% CGT discount if you have held over twelve months, though legislation changes that for gains accruing from 1 July 2027 (see below).

Step one: convert the offset to a comparable return

Comparing a 6.5% mortgage rate against an 8% expected ETF return is not a fair comparison, because one figure is after tax and the other is before it. To compare properly, gross up the offset rate using offset rate ÷ (1 − marginal tax rate):

Resident rates for 2026–27, excluding the 2% Medicare levy. Including it, the top rate is 47% and the equivalent becomes 12.26%.

This is the calculation that surprises people. On the top marginal rate plus Medicare, an ordinary 6.5% mortgage is the equivalent of a taxable investment returning more than 12% per year — guaranteed, with no volatility and no sequencing risk. Very few investors would describe a reliable 12% as a low bar. For the full version of this calculation, see what return you need to beat your offset account.

Step two: run the actual comparison

The figures below come from the calculator on this site: $100,000, a 6.5% mortgage rate, 8% ETF capital growth plus 3.8% dividends, a 30% marginal tax rate, and the current 50% CGT discount. These are calculated gains, not final balances.

Calculated gain under these specific assumptions only. Not a recommendation.

Under these assumptions the ETF leads at every horizon, and the gap widens over time. That widening is the deferred-tax effect: capital growth compounds untouched by tax until the moment of sale, while the offset's benefit, though tax-free, is capped at the mortgage rate.

What actually changes the answer

Your mortgage rate — the biggest lever by far

Holding the ETF at 8% growth and varying only the mortgage rate, over 25 years:

25-year holding period, 30% marginal rate, all other assumptions held constant.

At almost exactly 8%, the ranking flips. If you lived through mortgage rates of 9% or 10%, the offset account was close to unbeatable; at 5%, it struggles to compete with a growth asset. Your mortgage rate is not a detail in this comparison — it largely is the comparison.

Your tax rate — a smaller effect than most people expect

Over 25 years, varying only the marginal tax rate:

The offset figure does not move because its benefit is untaxed at any marginal rate.

This one cuts against conventional wisdom. Yes, a higher tax rate helps the offset account relatively — the ETF falls from $662,369 to $520,975 while the offset stays flat. But it is not enough to reverse the ranking on its own, because only the dividend portion is taxed annually; the capital growth is deferred and, under current rules, discounted. Tax rate alone is a weaker lever than the arguments on forums usually suggest.

Holding period: when the two run neck and neck

With an 8% mortgage rate and default assumptions elsewhere, the two options converge steadily over time:

At year 25 the gap is under 1% of the total — effectively a tie.

A $5,000 gap after twenty-five years is not a meaningful difference; it is a rounding error inside assumptions nobody can forecast that far out. When a comparison is this close, the decision should rest on something other than the projected number — access to the money, sleep at night, or whether you would actually stay invested through a 40% drawdown.

The break-even mortgage rate

Rather than guessing at growth rates, invert the question: what mortgage rate would your offset account need to match the ETF? Using the calculator's break-even solver on default assumptions:

30% marginal rate, 8% ETF growth plus 3.8% dividends, current 50% CGT discount.

Framed this way the question becomes tractable. You do not need to predict the share market for twenty years — you only need a view on whether your mortgage rate will average above or below roughly 8%. That is still a forecast, but it is a far more grounded one.

How the 2027 CGT changes shift the result

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received Royal Assent on 26 June 2026, replaces the 50% CGT discount for individuals, trusts and partnerships with cost base indexation (only the inflation-adjusted gain is taxed) and a 30% minimum tax for gains accruing from 1 July 2027. Gains accrued before that date keep the 50% discount, even if the asset is sold later.

For a new ETF investor, almost all of a long holding period would fall under the new rules. Applying them to the whole period, with 3% inflation for indexation, as a simplified scenario:

Offset gain is unchanged at $382,770 (6.5% mortgage). Simplified illustration; ignores the transitional pre-July 2027 component.

Two things stand out. In this simplified model, the 15% tax-rate scenario shows the largest reduction, because the 30% minimum lifts tax on gains from an effective 7.5% of the nominal gain to 30% of the real gain. (In practice a large capital gain can itself push a taxpayer into a higher bracket, and some income-support recipients are exempt from the minimum tax.) And the break-even mortgage rate over 25 years falls from about 8.03% to 7.67% at a 30% tax rate. The change narrows the ETF's lead; on these assumptions it does not eliminate it. The offset account is unaffected, since it never generates a capital gain.

For the detail of the new rules, including the transition, see the 2027 CGT changes explained.

What the numbers leave out

Risk is not in the headline figure. A projected $589,887 from an ETF and $382,770 from an offset account are not equivalent kinds of number. One is contingent on twenty-five years of assumed growth arriving on schedule; the other is close to arithmetic. The calculator offers an optional risk-adjusted view that applies a haircut to riskier options as a tie-breaker. Under that view, with identical assumptions, the offset account leads at 25 years — $382,770 against the ETF's risk-adjusted $353,932. The haircut is a simplified illustration, not a volatility model, but it makes the point that ranking by raw projected gain quietly assumes the risk away.

Behaviour is not in the figure. The ETF projection assumes you hold through every downturn without selling. Investors who capitulate in a crash do not receive the modelled return. The offset account has no equivalent failure mode.

Investment loans work differently. Everything above assumes a home loan used for private purposes. Where interest on a loan is deductible because the borrowed funds are used for income-producing purposes, money held in an offset reduces both the interest paid and the deductible interest expense. As a simplified illustration, a 6.5% deductible loan at a 30% marginal tax rate has an after-tax interest cost of about 4.55%, ignoring the Medicare levy and individual tax circumstances. That makes ETFs look considerably stronger by comparison.

Debt recycling is a third path. Some borrowers pay down the home loan and re-borrow through a separate split to buy investments. Where the reborrowed funds are used for income-producing investments, the associated interest may be deductible, subject to the tax rules, loan structure and tracing of the borrowed funds. It changes the arithmetic materially, carries its own risks and record-keeping requirements, and is not modelled here.

Also not modelled: franking credits (which favour the ETF), brokerage and management fees (which reduce it), redraw versus offset differences, lenders mortgage insurance, or the possibility that you spend the offset balance instead of leaving it there.

When each tends to look stronger

Offset account

• Mortgage rate above roughly 8% (about 7.7% in the simplified post-2027 CGT scenario), on the assumptions used here.
• Short or uncertain holding period — deferred CGT needs years to compound.
• You want certainty, same-day access, or the money has a purpose in the near future.
• You know you would struggle to hold through a market fall.

ETF

• Mortgage rate comfortably below your assumed long-run growth rate.
• Long holding period, letting untaxed capital growth compound.
• The loan interest is tax-deductible, so the offset benefit is reduced to an after-tax figure.
• You can tolerate volatility without selling at the wrong time.
• You value diversification away from a single property asset.

Run it on your own numbers

Your mortgage rate is not 6.5% and your tax rate may not be 30%. Every figure above shifts with those inputs, and the ranking can reverse. The calculator lets you set all of them, compare options side by side, switch between nominal and risk-adjusted views, and, with Advanced, solve for the break-even directly.

Common questions

Is it better to put money in an offset account or an ETF?

Neither is universally better. On a 6.5% mortgage with 8% assumed ETF growth and a 30% tax rate, the ETF shows a higher calculated gain at every horizon from 5 to 25 years. At an 8% mortgage rate the two are within about 1% of each other after 25 years. On the risk-adjusted view, the offset leads at 25 years. The answer follows the assumptions.

What return would an ETF need to beat my offset account?

As a rough guide, compare against the grossed-up offset figure: offset rate ÷ (1 − marginal tax rate). At 6.5% and a 30% marginal rate, that is about 9.29% before tax. Because ETF growth is taxed only on sale, the precise break-even is lower — the calculator's solver gives it directly.

Does a higher tax rate make an offset account better than an ETF?

It narrows the gap but does not reverse it on default assumptions. The 25-year ETF gain falls from $662,369 at a 15% rate to $520,975 at 45%, still well above the offset's $382,770.

How do the 2027 CGT changes affect offset vs ETF?

They make ETFs less attractive relative to the offset. In a simplified scenario applying the legislated rules to the whole gain, replacing the 50% discount with indexation and a 30% minimum tax cuts the 25-year ETF gain from $589,887 to about $534,973 at a 30% tax rate, and lowers the break-even mortgage rate from about 8.03% to 7.67%.

Is the offset benefit tax-free on an investment loan?

Not in the same way. Where loan interest is deductible because the funds are used for income-producing purposes, the offset also reduces your deduction. As a simplified illustration, a 6.5% deductible loan at a 30% rate has an after-tax cost of about 4.55%.

Should I split between both?

Many people do, and the calculator can be run on partial amounts to see the effect. Splitting reduces both the concentration risk of a single strategy and the regret of being entirely wrong in one direction. Whether it suits your circumstances is a question for a licensed adviser, not a calculator.

Does this account for franking credits?

No. The dividend component is modelled as taxed at your marginal rate with no franking benefit. Franking credits would improve the ETF's after-tax position for Australian shares, so the ETF figures shown here are, in that respect, conservative.