Term Deposit vs Offset Account: Which Is Better for Your Cash?

If you have a mortgage with an offset account and a lump sum sitting in cash, you've probably asked this question: should I put it in the offset, or lock it in a term deposit?

Both options put idle cash to work. But they work differently, and the right answer depends on your interest rate, your tax situation, and how likely you are to need the money.

How each one works

An offset account sits alongside your mortgage. The balance reduces the principal you're charged interest on — so $50,000 in your offset, against a $400,000 mortgage, means you only pay interest on $350,000. You can withdraw the money anytime.

A term deposit pays a fixed interest rate for a fixed period. You lock the money away — typically 3 months to 2 years — and earn interest, which is added to your income and taxed at your marginal rate. Early withdrawal usually incurs a penalty.

The maths: offset vs term deposit

The offset benefit is equal to your mortgage interest rate. If your home loan is at 6.00%, every dollar in offset is effectively earning 6.00% — tax-free, because it's a reduction in interest paid rather than income earned.

Say a term deposit is paying 5.00%, but that return is taxable. If you're on a 37% marginal rate, your after-tax return drops to around 3.15%. Against a 6.00% mortgage rate, the offset wins clearly.

The crossover point depends on your numbers:

• If your mortgage rate is higher than the term deposit rate after tax → offset wins
• If the term deposit rate after tax is higher than your mortgage rate → term deposit wins
• If you have no mortgage → offset is irrelevant; term deposit is the straightforward choice

For most borrowers on a standard variable rate, the offset wins — mortgage rates tend to sit above what term deposits offer, and the tax-free nature of the offset widens the gap further.

When a term deposit makes more sense

There are situations where the maths tips in favour of a term deposit:

You've already fully offset your loan. If your offset balance equals your loan balance, the marginal benefit of adding more drops to zero. Any additional cash is better deployed in a term deposit or elsewhere.

Your mortgage rate is unusually low. Some borrowers locked in fixed rates below 3% in 2021–2022. Those loans are rolling off now, but if you still have one, term deposit rates may well exceed your mortgage rate even after tax.

You don't have an offset account. Not all home loans include one — it's usually a feature of variable or package loans, often with a fee. If you're on a basic variable or fixed loan without offset, a term deposit is the obvious way to put cash to work.

The money won't be needed for years. Offset accounts encourage spending — the money is always accessible. If you want to ringfence savings for a specific goal and keep it out of reach, a term deposit provides that friction deliberately.

The flexibility factor

Offset accounts give you instant access to your money. Term deposits don't — early withdrawals typically cost 20–50% of the interest earned, and some lenders require 31 days' notice even then.

If there's any chance you'll need the money in the next 12 months — an emergency, a renovation, a property purchase — the offset is safer. The term deposit penalty can wipe out weeks of interest advantage in a single withdrawal.

Tax: the offset's hidden advantage

Interest earned on a term deposit is assessable income, taxed at your marginal rate. The benefit of an offset account is not — it reduces interest paid, which isn't income.

For anyone on the 37% or 45% tax bracket, this difference is substantial. A 5.00% term deposit becomes roughly a 2.75–3.15% after-tax return. Almost no mortgage in Australia charges that little right now.

This is the most commonly overlooked part of the comparison. Gross rates on term deposits look competitive; after-tax returns often aren't.

A simple decision framework

• Do you have a mortgage with an offset? → Start there. Run the after-tax comparison before moving any money.
• Is your offset already fully loaded? → Term deposit for the excess.
• Are you in the top two tax brackets? → Offset almost always wins until the loan is gone.
• No mortgage, no offset? → Term deposit is the right tool. Compare rates across lenders before committing.

One action you can take today

If you're not sure which way the numbers fall, work backwards: take your mortgage interest rate, then calculate what a term deposit would need to pay — before tax — to match it. At a 37% marginal rate and a 6.0% mortgage, you'd need a term deposit paying over 9.5% to come out ahead. That doesn't exist. Check current rates at RatePulse — if none clear your threshold, the offset is the answer.

This is general information, not financial advice. Tax outcomes depend on your personal circumstances. Consider speaking with a tax adviser or financial planner before making decisions involving significant sums.