How this four-scenario model works

This calculator simulates four fundamentally different strategies for deploying a lump sum of money, all starting with the same initial cash and the same annual out-of-pocket cost — making them genuinely comparable.

Cashflow Neutrality (the key principle)

The anchor is Scenario B's annual repayment — the original full P&I payment on your loan. All four scenarios cost the same per year out of pocket. Scenario A invests the repayment saving into shares. Scenario C pays the same as B in mortgage repayments. Without this constraint, you'd be comparing apples to oranges.

The four scenarios

• A — Cashflow Saver: Lump sum into offset. Repayment reduced to interest-only on the effective balance (loan minus offset). Loan principal is never reduced. The repayment saving vs Scenario B is invested in shares each year — two simultaneous income streams: guaranteed tax-free interest saving + market returns. Wealth = offset cash + cumulative interest saved + share portfolio.
• B — All in Offset: Lump sum into offset. Original full P&I repayment maintained. Since less interest is charged, every cent of interest saved goes directly to principal — a compounding snowball that can shave 8–12 years off a 25-year term. Maximum guaranteed, risk-free outcome. Wealth = offset cash + extra loan equity paid down vs starting position.
• C — All in Shares: Lump sum goes directly into shares. Standard P&I repayment on the unchanged loan. All dividends (after franking credit adjustment) reinvested. Maximum market exposure, highest expected ceiling, most volatile. Wealth = share portfolio after CGT and brokerage.
• D — Balanced Investor: Lump sum into offset. Continue normal P&I repayments on the effective balance (loan minus offset). Your required repayment is slightly lower than the full original P&I because less interest is charged. The modest freed cashflow is invested in shares each year. Loan reduces, offset works, and spare cashflow is deployed — the realistic middle ground between A and B. Wealth = offset cash + after-tax interest saved + share portfolio + extra equity vs C.

The hurdle rate formula (and why it's a heuristic, not a hard rule)

The offset earns your mortgage rate guaranteed and tax-free. The simple break-even formula is:
Hurdle = Mortgage Rate ÷ (1 − Marginal Tax Rate)
At 6% mortgage and 37% tax: 6% ÷ 0.63 ≈ 9.5% gross p.a.
However, this formula overstates the required share return for a PPOR. It assumes all investment returns are taxed in full every year — like a savings account. Shares aren't: capital gains are deferred until you sell and then receive a 50% CGT discount if held more than 12 months (the 50% discount applies to the pre-1 July 2027 share of the gain; the post-1 July 2027 share is CPI-indexed and taxed at a 30% minimum under Acts No. 49 and 50 of 2026 — this calculator now models both, per FIFO lot, per the note above the results), and franking credits from Australian companies partially offset dividend tax. These two factors significantly reduce the effective tax drag, making the real break-even return well below the formula's result. For an IP (where mortgage interest is deductible), the formula is accurate in reverse — the offset's real after-tax benefit is rate × (1 − tax), a much lower bar for shares. The simulation uses year-by-year FIFO CGT and franking credit modelling — trust its output over the hurdle heuristic.

Monte Carlo methodology

• Share returns: lognormal distribution. The log-mean is set so the median compound return equals exactly your CAGR input. This avoids overstating expected outcomes (arithmetic mean bias).
• Interest rates: Ornstein-Uhlenbeck (mean-reverting) process. Rate shocks decay back toward your base rate. Clamped to 0.5%–15% to avoid nonsensical paths.
• 300 simulations. Win % = share of paths where each scenario has the highest terminal wealth.

Tax treatment

• Dividends: grossed up for franking credits. If credits exceed your tax liability (e.g., super fund, low income), the excess is treated as a cash refund.
• CGT: FIFO lot selection. Each lot is time-apportioned by its own purchase date: 50% discount for the share of a gain accruing before 1 July 2027 (individual; 33.3% for super, unconditionally), CPI-indexed cost base at a 30% minimum tax for the share accruing from it (Acts No. 49 and 50 of 2026, enacted) — see the note above the results.
• Offset: interest saving is tax-free — no income recognised. This is the core advantage.

Worked example

These are the calculator's own shipped defaults, so you can reproduce every number below by loading this page and pressing Calculate.

Verdict on these inputs: Scenario C wins by about $49,000, and the share path overtakes the offset paths in year 1. That margin is roughly 14% of the winning figure over a decade — close enough that the inputs it turns on matter more than the ranking itself.

What moves it. Raise the mortgage rate and the offset's guaranteed, tax-free return climbs while the share return does not; at a high enough rate B and D overtake C. Drop the share growth rate and the same happens. Switch Purpose to an investment property and the interest becomes deductible, which cuts the offset's after-tax benefit to rate × (1 − tax) and moves the comparison toward shares. Switch Investor type to a super fund and the 15% dividend rate plus the 33.3% CGT discount move it further the same way. The Sensitivity tab sweeps these for you rather than asking you to guess.

What the figures do not include: home equity. All four borrowers own the same property, so it cancels — see the framing note above.

Limitations & assumptions

• The 1 July 2027 CGT reform is modelled. Each FIFO share parcel is time-apportioned by its own purchase date: the 50% discount for the share of a gain accruing before 1 July 2027, CPI-indexed cost base at a 30% minimum tax for the share accruing from it (Acts No. 49 and 50 of 2026). CPI uses a constant assumed rate (2.5% p.a. by default), not the ATO’s published quarterly figures, and the Subdivision 112-E deemed-disposal mechanism is not modelled — see the CGT note above the results for both. Complying super funds keep the flat 33.3% discount unconditionally, unaffected by the reform.
• Home equity is excluded from every scenario, deliberately. All four borrowers own the same property, so it cancels in any comparison; what is measured is only the marginal wealth from how the lump sum is deployed.
• One rate, one tax rate, for the whole horizon unless you use the Monte Carlo tab. The deterministic run holds your mortgage rate and marginal rate constant — real rates move and real incomes cross brackets.
• Dividend yield and growth are separate, constant inputs. Real dividends are cut in downturns, precisely when the growth assumption is also failing; the model does not correlate them.
• Franking is a single blended percentage. A real portfolio holds fully franked, partly franked and unfranked shares in changing proportions.
• Brokerage is charged as a percentage of each trade and no minimum-fee floor is applied, so very small parcels are modelled slightly cheaply.
• Offset interest is assumed to be fully effective — every dollar in the account offsets a dollar of loan balance. Partial offsets, sub-account rules and lender-specific caps are not modelled.
• No transaction, redraw or account fees, and no lender's annual package fee.
• The Monte Carlo tab runs 300 paths. That is enough to show the shape of the distribution and not enough to read a single percentile to the dollar.
• All figures are in AUD and nominal — not adjusted for inflation. This is general information, not personal financial advice.

Glossary

• Offset account: a transaction account linked to your loan. Its balance is subtracted from the loan before interest is calculated, so it earns your mortgage rate — with no tax, because you never receive income.
• Effective balance: loan balance minus offset balance. It is the figure interest is actually charged on.
• Cashflow neutrality: the rule that makes the four scenarios comparable — each costs the same out of pocket per year, so what differs is strategy, not commitment.
• Hurdle rate: the gross share return needed to match the offset. The heuristic is mortgage rate ÷ (1 − marginal rate); it overstates the bar for a PPOR, for the reasons above.
• P&I: principal and interest — a repayment that reduces the balance, as opposed to interest-only, which does not.
• Franking credit: tax already paid by an Australian company on profits paid out as a dividend. You are taxed on the grossed-up amount and credited with the tax paid; if the credit exceeds your liability the excess is refunded.
• FIFO: first in, first out — the order share parcels are treated as sold in, which decides each parcel's cost base and holding period for CGT.
• CGT discount: the reduction applied to a capital gain on an asset held over 12 months — 50% for individuals before 1 July 2027, 33.3% for complying super funds.
• MER: management expense ratio — the annual percentage an ETF or fund charges, deducted from returns.
• PPOR: principal place of residence, i.e. the home you live in. Its mortgage interest is not tax deductible, which is what makes the offset so strong against it.

Frequently asked questions about offset accounts vs shares

• Should I put money in a mortgage offset account or invest in shares in Australia?

  The offset earns your mortgage rate tax-free and risk-free. A common heuristic is: hurdle = mortgage rate divided by (1 minus marginal tax rate). But for a PPOR this formula overstates the required share return because it treats all investment gains as taxed annually — shares are not. Capital gains are deferred until sale and receive a 50% CGT discount after 12 months (the 50% discount applies to the pre-1 July 2027 share of the gain; the post-1 July 2027 share is CPI-indexed and taxed at a 30% minimum under Acts No. 49 and 50 of 2026 — this calculator now models both, per FIFO lot, per the note above the results), and franking credits offset dividend tax. The effective break-even return is well below the formula suggests. This calculator runs a year-by-year FIFO CGT simulation so you can see the real after-tax comparison for your own numbers.

• What is cashflow neutrality in an offset vs shares comparison?

  Cashflow neutrality means all three scenarios cost the same amount per year out of pocket, making them genuinely comparable. The anchor is Scenario B's full P&I repayment. Scenario A invests the repayment saving into shares each month. Without this constraint you would be comparing different levels of financial commitment, not different strategies.

• What is the hurdle rate for offset vs shares in Australia?

  The hurdle rate heuristic is: Mortgage Rate divided by (1 minus Marginal Tax Rate). At 6% and 37% tax that gives 9.5%. However, this formula treats shares like a savings account taxed annually in full — it ignores that capital gains on shares are deferred until sale and receive a 50% CGT discount after 12 months (the 50% discount applies to the pre-1 July 2027 share of the gain; the post-1 July 2027 share is CPI-indexed and taxed at a 30% minimum under Acts No. 49 and 50 of 2026 — this calculator now models both, per FIFO lot, per the note above the results), and that franking credits offset dividend tax. These factors significantly reduce the effective tax drag, making the real break-even share return well below the formula's output. The formula is accurate for an investment property (where the offset's benefit is rate times (1 minus tax)), but not for a PPOR.

• How do franking credits affect the offset vs shares comparison?

  Franking credits attach to fully franked dividends from Australian companies. Individuals can claim them as a tax offset or refund. Super funds at 15% tax rate receive a large portion back as cash. This materially improves the after-tax return of Australian shares versus the theoretical hurdle rate.

• What is the All in Offset scenario in the offset calculator?

  All in Offset puts a lump sum into the offset account and maintains the original full P&I repayment. Since less interest is charged each month, the entire interest saving goes directly to principal — a compounding snowball that can reduce a 25-year loan by 8 to 12 years with no extra cash outlay. It is the maximum guaranteed risk-free outcome.

• Can I use a super fund tax rate in the offset vs shares calculator?

  Yes. Select Super Fund (15%) as your investor type. The calculator applies a 15% dividend tax rate and 33.3% CGT discount for assets held over 12 months, significantly improving the after-tax share return compared to a 37% or 45% individual rate. Complying super funds are unaffected by the 1 July 2027 individual CGT reform, so the 33.3% discount is correct for super on both sides of that date.

• Should I put money in my offset account or invest in shares in Australia (2026)?

  At a 6.3% mortgage rate and 37% marginal tax rate, the tax-free offset return is 6.3%. To beat that with shares after CGT and income tax, you'd need a gross return of approximately 7.5–8.5% depending on your holding period and franking credits. The ASX 200 has averaged around 9–10% including dividends historically, so shares have historically won for most investors with a 10+ year horizon — but with significantly more volatility and risk. Use this calculator to model your exact numbers and see the year-by-year comparison.

• How does the mortgage rate affect the offset vs shares comparison?

  The higher the mortgage rate, the stronger the offset account's guaranteed return. At 5% the offset returns 5% tax-free and risk-free — shares need to significantly outperform to compensate for risk. At 7% the offset's guaranteed return becomes hard to beat reliably. At low rates (2–3%), shares are clearly superior for most investors with a long horizon and moderate tax rate.

• What is the Monte Carlo simulation in this offset vs shares calculator?

  The Monte Carlo simulation runs 1,000 scenarios where annual share returns vary randomly each year using a distribution calibrated to your expected return and historical volatility. It shows the range of possible outcomes for investing in shares versus the certainty of the offset account return. The probability that shares outperform the offset is shown as a percentage — a key insight for risk-aware decision making.

• Does paying down the mortgage or using an offset account produce the same result?

  No — there is an important difference. Extra repayments permanently reduce your loan balance and cannot be accessed again without refinancing. Money in an offset account reduces interest exactly the same way, but remains accessible as a liquid emergency fund or investment opportunity fund. For most borrowers, offset is superior to extra repayments because you get the same interest saving with full access to your cash.

• How does negative gearing affect the offset vs shares comparison for investment properties?

  For an investment property, the offset account's effective after-tax benefit is reduced because mortgage interest is tax-deductible — so the net interest cost is rate × (1 − tax rate). A 6.3% mortgage at 37% tax effectively costs 3.97% after deductions. This makes it much easier for shares to beat the offset on an investment property than on a PPOR, where no interest deduction applies.

Related tools

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• Property vs Shares Calculator (Australia)
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