What is an offset account and how does it work?

Mechanically, the offset balance is daily-netted against your loan principal for interest calculation. If your mortgage is at 6% and you keep $50K in offset, you save $3,000/year in interest. The balance stays liquid, you can withdraw it any time as a normal transaction account.

Tax effect: the interest you save isn't income, so it isn't taxed. If the same $50K were sitting in a high-interest savings account at 4% earning $2,000 of taxable interest, at 39% marginal rate you'd net only $1,220, vs $3,000 saved in offset (effective return ~6% pre-tax-equivalent vs 4% pre-tax savings rate).

Most variable-rate loans include offset; most fixed-rate loans don't (or only allow partial offset). When refinancing or fixing, factor in offset functionality, losing it is often the hidden cost of a fixed-rate switch.

Investment property optimisation: if you have a PPOR + IP, keep offset against the PPOR loan (deductibility is irrelevant on PPOR, so saving non-deductible interest is most valuable). On the IP loan, retain principal in the loan itself + claim full interest as a deduction. This is the canonical 'split offset' structure.