Numbers… I’m confused… needs some clarity please

Yes – You could take $100k and compound it at 3% each year or FV=PV(1+0.03)^10 and subtract this increase from the 6.5% amount in ten years time.
You would pay tax each year from the 6.5% interest thus reducing your interest from cash even more.
year one $100,000 * 6.5% = 6500 then subtract say 30% in tax  approx $1950 equals 4550
Year two $104,550 * 6.5% = 6795 then subtract say 30% in tax approx $2038 equals 4757
year three $109.307 * 6.5% = 7104 then subtract say 30% in tax approx $2131 equals 4973
Notice that the tax payable increases each year so it makes it not a good investment and does not
take into account the CPI inflation which is why I do not save money.

You need to reduce the capital gain by 50% if owned for more than 12 months I think indexation was a lot fairer for long term investments as the CPI was taken into account  but it no longer applies after 1999 I think.
What you need to work out is the cash flow loss each year  plus the 3% for CPI
Expenses – Rent = cash loss
You have to make a gain of this each year to just break even now you need to take into account the CGT .
I worked it out to 7.1% capital gain each year to break even taking 3% CPI and 4500 a year cash loss .
Based on rental yield of 4% on a loan of 100,000
at 6.5% interest and capital gains tax of 30%
If you can pay off the loan quicker you can get ahead of the interest costs

No that is too simple
If you are making the same P & I repayment then you get a compounding effect
and end up paying more off the loan as each repayment bites more into the principle owing.
So yes interest rate saved could be 7000 but the repayment is a saving as well

one worrying factor for me is that interest rates are not just determined by the RBA anymore and as off shore money is costing the banks more to borrow the banks could pass this extra cost on to borrowers rather than absorb it.

If you leave funds in the offset account you have the option to use it later if things go bad in the market.
You need to work out how much risk you can tolerate.

And work out what if you lost a tenant for 3 – 4 months how would you manage.
if interest rates increased to 10.5% how would you manage.
How stable is your employment and how would you manage if you lost your job.

i would disregard inflation for this sort of scenario as it will apply for any option you go with.

You should also consider that if you had $100,000 cash you should be using this to pay down your non-deductible home loan and then reborrowing it to invest. You will be be saving $x pa in interest and will also be able to get the other investments too.

Glad to hear you are getting your head around it. Hard to put a figure on 'risk' though.
The more you know about investing the more you can be aware of and the lower the risk it. Some of that comes from reading books etc. some of it comes from life experience.

I don't know anyone who got rich by sticking their money in a term deposit though.