How offset interest is actually calculated (a worked example)

The setup

A hypothetical loan — illustrative figures, chosen to make the arithmetic easy to follow:

Everything below follows from those four numbers. Nothing else is assumed.

What does a day of interest cost?

First, without any offset. The bank charges interest on the full loan balance:

Now with the offset linked. The bank subtracts the offset balance first, then applies the same formula to what's left:

One day of offset benefit: $98.63 − $90.41 = $8.22. Small. That is the point — the benefit is quiet, which is why it is rarely checked and why errors inside it are rarely noticed.

What does the month look like?

The daily amounts are summed over the statement period and charged once:

Hold that $50,000 steady for a year and the benefit is the simplest line in this article: $50,000 × 6.00% = $3,000.00 of interest you don't pay. Because it is interest avoided rather than interest earned, the ATO does not tax it as income.

What happens when the balance moves?

The offset benefit follows each day's closing balance, so timing matters. Take the same loan, but an $8,000 salary deposit lands in the offset on day 11:

Two practical consequences. Depositing earlier in the month is worth more than depositing later — the same money, the same account, a different benefit. And a large withdrawal mid-month costs more than the same withdrawal a fortnight later would have. The bank's systems track all of this to the day; a borrower eyeballing a monthly figure cannot.

Where can a cent legitimately go missing?

Look again at the monthly benefit. Subtract the rounded totals and you get $246.57. Compute the benefit directly at full precision and round at the end and you get $246.58. Both are correct. They differ because banks round at different points: some round each daily amount to the cent before summing, some carry full precision and round the monthly total.

This is why tolerance exists. A cent or two of difference is rounding, not an error. A difference that repeats every month, grows over time, or always runs in the bank's favour is a different matter — that is a pattern, and patterns are what an audit looks for. Your loan contract states the day-count convention (365 is standard in Australia, including leap years, but not universal) and the bank's product disclosure states how the offset is applied. When we re-calculate a loan, we reproduce the bank's own stated method first, then test it.

What else moves the number?

• Rate changes. A new rate applies from an effective date, so a month can contain two rates. The daily calculation splits across them.
• Month length. A 31-day month charges 31 daily amounts. February charges 28 or 29.
• Partial offset. Some products offset only a percentage of the account balance. The formula is identical; the offset figure going into it is not.
• Interest-only vs principal-and-interest. The interest calculation is the same either way; what differs is what the repayment does next.

Each of these gets its own working in future entries. The formula above stays the spine of all of them.

How do I check my own statement?

1. From your loan statement: the interest charged, the period, the rate(s) that applied.
2. From your offset account: the closing balance for each day of the period.
3. Apply the formula per day, sum the period, compare to the bank's figure.
4. Difference within a cent or two: rounding. Anything more: check the link, the rate and the dates — then the bank.

Or run the check — upload the statements and the whole period is re-calculated line by line, to the cent, with the working shown either way. New to offset accounts? Start with what an offset account is, exactly.

Frequently asked questions