You've got spare cash, a mortgage, and a bank happy to sell you a term deposit at the best rates in years. So where should the money live? Here's the answer most comparison pages bury: on a 6.1% mortgage, if you earn between $135,000 and $190,000, a term deposit would need to pay 10% before tax to match what the same money saves you sitting in your offset. The best term deposit in Australia right now pays 5.55%. That's the whole article in two sentences, and the rest of it shows the working, because you shouldn't take a number like that on faith.
We don't sell term deposits or home loans, and no bank pays us to shape this comparison. Most pages on this topic are run by a lender with a product on one side of the ledger. This one isn't, so we can also be honest about the handful of situations where the term deposit genuinely wins.
Last updated 23 July 2026. For anyone with a mortgage and a genuine 100% offset account, money in the offset beats money in a term deposit at every income tax bracket, because the offset saving is tax-free while term deposit interest is taxed as income. Best 12-month term deposit today: 5.55% before tax, which nets 3.39% to 3.77% after tax for most workers. A 5.7% to 6.4% mortgage offset "pays" its full rate, tax-free. Both are covered by the government's $250,000 deposit guarantee when the offset is a separate deposit account.
The Short Answer
Every dollar in a 100% offset account reduces the loan balance your bank charges interest on, calculated daily. Money there effectively "earns" your mortgage rate, with no tax to pay, because the ATO doesn't treat interest you avoided paying as income. A term deposit earns headline interest that gets taxed at your marginal rate, and in 2026 even the best headline rate in the country ends up well behind after tax.
So for the typical reader of this site, a first home buyer a year or two into a variable loan with an offset attached, the decision is nearly automatic: spare cash lives in the offset. The genuine exceptions, and there are a few, are further down.
Why the Offset Usually Wins: Tax Treats Them Completely Differently
This is the part the bank product pages skim past, and it's the entire ballgame.
Term deposit interest is assessable income. The ATO is explicit: interest from financial institution accounts and term deposits must be declared in the year it's credited or applied, and for a term deposit that generally means the year it matures. Roll the deposit over and the interest is still assessed at that rollover date. It stacks on top of your salary and gets taxed at your marginal rate, plus the 2% Medicare levy.
Offset savings are not income. The tax office settled this back in 1993, in a ruling that's still current (TR 93/6): a properly structured mortgage offset doesn't pay you interest at all, it reduces the interest you're charged, so there's nothing to declare and nothing to tax. A dollar of interest avoided is worth more than a dollar of interest earned, every single time you pay tax.
For the 2026-27 year, the marginal rates that matter: 15% up to $45,000 (this dropped from 16% on 1 July, and falls again to 14% from July 2027), 30% to $135,000, 37% to $190,000, and 45% beyond, each plus 2% Medicare for most people.
The Break-Even Table for 2026
The comparison collapses to one formula. A term deposit only matches your offset when its rate, after tax, equals your mortgage rate. Rearranged: break-even TD rate = your mortgage rate divided by (1 minus your marginal tax rate). Here's what that produces at current mortgage rates, including Medicare:
| Your variable rate | Earning $45k to $135k (32% all-in) | Earning $135k to $190k (39% all-in) |
|---|---|---|
| 5.5% | TD must pay 8.09% | TD must pay 9.02% |
| 5.7% | TD must pay 8.38% | TD must pay 9.34% |
| 6.0% | TD must pay 8.82% | TD must pay 9.84% |
| 6.1% | TD must pay 8.97% | TD must pay 10.00% |
No Australian bank has paid anything like 8% on a term deposit since before the GFC. Even someone in the lowest bracket (15% plus Medicare) needs a term deposit paying 6.63% to beat a 5.5% mortgage offset, and today's best is 5.55%. The offset wins at every bracket, on every realistic mortgage rate, before we even mention that the offset saving compounds daily against your loan.
What $20,000 Actually Earns Each Way
Formulas are easy to nod along to. Dollars are clearer. Take $20,000 of spare cash for one year:
| Where it lives | Gross return | After tax (32% all-in) | After tax (39% all-in) |
|---|---|---|---|
| Offset against a 5.5% loan | $1,100 saved | $1,100 | $1,100 |
| Offset against a 6.0% loan | $1,200 saved | $1,200 | $1,200 |
| Best term deposit, 5.55% | $1,110 earned | $754.80 | $677.10 |
| Strong term deposit, 5.40% | $1,080 earned | $734.40 | $658.80 |
The gap is $345 to $541 a year on $20,000, in the offset's favour, and that actually understates it: offset interest is calculated daily against your loan balance, so with unchanged repayments the saving quietly accelerates your principal reduction month after month. The term deposit figure is also the best case, assuming you chased the single highest rate in the country rather than settling for a big bank's 5.25%.
What Term Deposits Pay Right Now (July 2026)
To be fair to the term deposit side, rates are the best they've been in years. After the RBA's three hikes this year (February, March and May, taking the cash rate back to 4.35%), the leaders on a 12-month term as of 23 July: Heartland Bank at 5.55%, Gateway Bank 5.50%, MOVE Bank 5.45%, and a cluster of smaller banks at 5.40%. Among the household names, Judo and Suncorp sit around 5.35% and NAB and CBA about 5.25%.
One quirk worth knowing: the deposit curve is currently inverted, meaning 6-to-12-month terms pay more than 2-to-5-year terms, because markets still expect the cash rate to fall eventually. That's why 12 months is the honest comparison term, and why locking in for longer currently pays you less, not more. The RBA held in June, calling inflation "still too high", and meets next on 11 August.
When a Term Deposit Genuinely Wins
An honest comparison names the exceptions rather than pretending there aren't any.
- You don't have a mortgage, or your loan has no offset. Obvious but worth stating: the offset "return" only exists while you have a loan to offset. Once the loan is gone, an offset is just a transaction account earning nothing.
- Adding an offset costs more than it saves. Offsets often come packaged with an annual fee or a slightly higher rate. A $10-a-month fee needs about $2,200 sitting in the offset (at 5.5%) just to pay for itself; a $395 annual package fee needs about $7,200. If your spare cash is small and your loan is basic, paying to add an offset can be a losing trade. The test: annual extra cost divided by your loan rate equals the minimum balance that justifies it. One bank's data suggests about half of offset holders keep no more than $20,000 in there, so this threshold genuinely bites for some people.
- You're on a fixed rate. Most fixed loans allow no offset or only a partial one, and some cap the offset balance at a low figure. If your whole loan is fixed with no offset, a term deposit (or a high-interest savings account) is where spare cash goes by default. Our fixed vs variable guide covers that trade-off properly.
- You know you'll spend the money and don't trust yourself. A term deposit is a commitment device: early access usually requires up to 31 days' notice and costs you some or all of the interest. Offset money is available the same day, which is exactly the problem if the "emergency" is a holiday. That's a behavioural reason, not a mathematical one, but it's real.
- Your taxable income is under $18,200. Below the tax-free threshold the asymmetry disappears, and a 5.55% term deposit nominally beats a 5.5% offset. On any mortgage rate above the best TD rate, the offset still wins even here.
Is Offset Money as Safe as a Term Deposit?
This is the question that keeps risk-averse savers in term deposits, and the answer is more reassuring than most people expect. The government's Financial Claims Scheme guarantees deposits up to $250,000 per person, per banking institution, and APRA's own list of covered accounts includes both term deposits and mortgage offset accounts that are set up as separate deposit accounts, which is how mainstream 100% offsets are structured.
Two fine-print points worth knowing. First, money sitting in a redraw facility is not a deposit and is not covered by the scheme, one of several reasons an offset beats stuffing extra repayments into redraw for money you might want back. Second, if a bank ever failed, your offset deposit would be paid out under the guarantee and your loan would remain a loan; the two don't cancel each other automatically. For balances beyond $250,000, spreading across more than one bank is the standard play, and that's a situation where a term deposit at a second bank earns its place.
Offset vs Redraw, in One Paragraph
An offset is a separate transaction account linked to your loan; the money is yours, accessible any time, and covered by the deposit guarantee. Redraw holds extra repayments you've made directly onto the loan itself; access is subject to your lender's terms, and it isn't a deposit. If you're choosing between them for savings you may want back, the offset wins on access, on legal ownership and on the guarantee. The full mechanics are in our offset account guide.
The Traps on Both Sides
Offset traps. The fee problem above is the big one: a packaged offset costing $395 a year with $5,000 in it is a product working for the bank, not you. Check whether your offset is a true 100% offset rather than a partial one, and whether the money is genuinely in a separate deposit account. If you're not sure what your loan actually has, that's a five-minute question for a broker, and the answer is sometimes "your lender charges you for an offset you're barely using while a competitor includes one free".
Term deposit traps. The rate you see advertised is before tax, and the comparison above shows how much that flatters it. Breaking a term early typically requires up to 31 days' notice and forfeits some or all of your interest. And the tax lands in the year the deposit matures or rolls over, so a big deposit maturing in June can push taxable income up in exactly the year you didn't want it to.
Frequently Asked Questions
Is it better to put money in an offset account or a term deposit?
If you have a mortgage with a genuine 100% offset, the offset wins at every tax bracket in 2026. The offset saves your full mortgage rate tax-free, while term deposit interest is taxed at your marginal rate, so the best 5.55% term deposit nets only 3.39% to 3.77% after tax for most workers against a tax-free 5.7% to 6.4% offset saving. The main exceptions: no mortgage, a fixed loan without an offset, or an offset whose fees exceed the benefit on a small balance.
Is the interest saved by an offset account taxable in Australia?
No. Under the ATO's long-standing ruling on offset arrangements (TR 93/6), a standard mortgage offset account doesn't pay you interest, it reduces the interest charged on your loan, so there is no income to declare. That tax-free treatment is precisely why an offset beats a term deposit paying a similar headline rate.
Are offset accounts covered by the $250,000 government guarantee?
Yes, when the offset is a separate deposit account, which is how mainstream 100% offset accounts are structured. APRA's list of accounts covered by the Financial Claims Scheme includes both term deposits and mortgage offset accounts, up to $250,000 per person per banking institution. Money in a redraw facility, by contrast, is not a deposit and is not covered.
What would a term deposit need to pay to beat an offset account?
Divide your mortgage rate by one minus your marginal tax rate (including Medicare). On a 6.0% mortgage, that's 8.82% for someone on the 30% bracket and 9.84% on the 37% bracket. No Australian term deposit pays anything close; the current market best is 5.55%.
Can I lose money in a term deposit?
Your capital is guaranteed up to $250,000 per person per bank under the Financial Claims Scheme, so a term deposit is about as safe as money gets in Australia. What you can lose is interest and access: breaking the term early usually requires up to 31 days' notice and can forfeit some or all of the interest earned, and inflation can quietly outrun the after-tax return.
Does money in an offset account earn interest?
No, and that's the point. An offset account pays no interest; instead, its balance is subtracted from your loan balance before daily interest is calculated. That's why the benefit is tax-free: you can't be taxed on interest you never received, you simply pay less on the loan.
Want to see what the offset saving does to your own loan over time? Run your numbers through our mortgage repayment calculator. And if you're not sure whether your loan even has a real 100% offset, or whether you're paying a package fee for one you barely use, a broker can review it for free; they're paid by the lender, not you. This article is general information, not personal financial advice; your tax position is your own, and for anything beyond the arithmetic here, a licensed adviser or accountant is the right person to ask.
