Otto was born on 16 December 1967 in Brisbane and was raised there and in Newcastle. She briefly lived in Hong Kong following her parents' divorce at age six. She spent weekends and holidays with her father in Sydney and developed an interest in acting through him. Research revealed that she is biologically of Scottish and Irish ancestry. Her surname comes from her father's stepfather, a butcher of German descent.
During her childhood, Otto and her friends wrote scripts and designed costumes and flyers in their spare time. She appeared in several plays at the Nimrod Theatre, which attracted the attention of casting director Faith Martin. Subsequently, Otto received a role in the 1986 World War II drama Emma's War.
She had wanted to be a ballerina but was forced to abandon that goal due to moderate scoliosis. Otto graduated from the National Institute of Dramatic Art in Sydney in 1990. Prior to graduation, she appeared in minor film roles including Initiation (1987) and The 13th Floor (1988).
