An offset account is a savings or transaction account that is linked to your mortgage account. The primary function of an offset account is to help you reduce the amount of interest you pay on your home loan.
Here’s how it can benefit you:
Benefits of an offset account
Reducing your interest
The balance in the offset account is used to ‘offset’ against your home loan balance. For example, if you have a home loan of $500,000 and $100,000 in your offset account, you will only be charged interest on $400,000.
Accessibility and flexibility
Money in an offset account is usually easily accessible, much like a regular checking or savings account. This means you can deposit and withdraw funds as you normally would as if it is an everyday bank account.
Pay off your loan faster
Because you are reducing the amount of interest you pay, an offset account can also help you pay off your loan faster.
Typically, your home loan monthly repayments remain the same, but with less interest to pay (thanks to the offset account), a larger portion of your repayment goes towards paying down the principal rather than interest.
Tax benefits
An offset account can provide you tax advantages in some setups. For example, say you have $100,000.
In a normal high interest savings account, you may earn 3% per annum (per year) on the $100,000. This will mean that you earned $3,000 at the end of the year in interest. This would get counted as part of your income and get taxed accordingly in the bracket you fall into. However, if you stick that $100,000 in an offset account, and your home loan interest rate is 5% per year. By the end of the year, you would have saved $5,000 in interest. This $5,000 in interest saved would be a net benefit for you as you are not taxed on that $5,000 saving via home loan interest and you technically did not earn any income, you simply didn’t spend $5,000 more on interest.
Example of savings using an offset account
Imagine you have a $700,000 home loan with an interest rate of 6%, and you keep $50,000 in your offset account.
Because the offset balance reduces the amount of the loan that interest is calculated on, the bank will only charge interest on:
$700,000 − $50,000 = $650,000
This means you avoid paying interest on the $50,000 sitting in the offset account.
Your annual interest savings would be approximately:
50,000 x 6% = $3,000
So in this example, the offset account saves you about $3,000 in interest per year, simply by keeping your savings in the offset account instead of a regular bank account.
Over time, this can significantly reduce the total interest paid on your mortgage and help you pay off your loan sooner.
Fees and costs associated with offset accounts
- Account-keeping fees: Many offset accounts come with monthly or annual account-keeping fees. These fees can vary and might be higher than those for standard savings or transaction accounts.
- Higher interest rates: Sometimes, lenders might charge a slightly higher interest rate on your home loan if you choose to have an offset account. It’s important to calculate whether the interest savings from the offset account outweigh the cost of a potentially higher interest rate.
- Application or setup fees: There might be a one-time fee when you initially set up the offset account, especially if it’s being set up in conjunction with a new home loan.
- Withdrawal fees: While many offset accounts offer easy access to funds, some may charge fees for withdrawals or have limits on the number of free transactions.
- Package fees: Offset accounts are often offered as part of a home loan package, and these packages can come with their own set of annual fees. However, they may also offer additional benefits like discounted home loan rates, credit card fees waivers, or other banking products.
- Minimum balance requirements: Some offset accounts may require a minimum balance to be maintained to get the benefits of the offset feature. Failing to maintain this balance could result in fees or reduced benefits.
- Early termination fees: If you decide to switch lenders / refinance / or close your offset account early, you might be charged a termination fee.
When an offset account may not be worth it
In Australia, offset loans often have:
- higher interest rates
- annual package fees
- account fees
Some lenders charge higher rates or fees for loans with offset features, so borrowers should compare the total cost carefully.
| Scenario | Reason |
|---|---|
| Small savings (<$5k) | savings may not offset fees |
| Fixed rate loan | offsets sometimes limited |
| Higher interest rate loan | may cancel out benefit |
Types of offset accounts
Not all offset accounts work the same way. In Australia, lenders generally offer two main types: 100% offset accounts and partial offset accounts.
Understanding the difference is important because it affects how much interest you actually save on your home loan.
100% offset account
A 100% offset account means every dollar in the offset account reduces the balance used to calculate interest on your loan.
Example:
Loan balance: $500,000
Offset balance: $20,000
Interest is charged on:
$500,000 − $20,000 = $480,000
Because the full balance offsets the loan, this type of account typically provides the maximum interest savings. Many Australian lenders offer 100% offset accounts with variable-rate home loans, often as part of a loan package.
Partial offset account
A partial offset account only offsets a portion of the money in the account against the loan balance.
For example, if the offset percentage is 40%, only 40% of the account balance reduces the loan used for interest calculations.
Example:
Loan balance: $500,000
Offset balance: $20,000
Offset percentage: 40%
Effective offset:
$20,000 × 40% = $8,000
Interest is charged on:
$500,000 − $8,000 = $492,000
Partial offset accounts are less common today and generally provide smaller interest savings compared to 100% offset accounts.
Which type is better?
For most borrowers, a 100% offset account provides greater flexibility and larger interest savings, especially if you keep significant savings in the account. However, some loans with offset features may have higher interest rates or package fees, so it’s important to compare the overall cost of the loan.
Tips for using an offset account effectively
Many Australian homeowners maximise the benefits of an offset account by using it as their primary banking account.
Some common strategies include:
Deposit income into the offset account
Keeping your salary or income in the account helps maintain a higher balance for longer.
Pay expenses from the offset
Instead of moving money out to another account, many people use their offset account for everyday spending.
Keep savings in the offset
Emergency funds or short-term savings can sit in the offset account where they reduce loan interest.
Leave money in the account for as long as possible
Because mortgage interest is usually calculated daily, maintaining a higher balance consistently can increase the potential savings.
Frequently asked questions about offset accounts
Do offset accounts reduce monthly repayments?
Offset accounts typically reduce the interest charged on the loan, which may shorten the loan term or reduce interest over time. The minimum repayment amount often stays the same.
Can you have multiple offset accounts?
Some lenders allow multiple offset accounts to be linked to the same loan. This can be useful for separating savings, bills, and everyday spending.
Are offset accounts available on fixed home loans?
Offset accounts are more commonly available with variable-rate loans, although some lenders offer limited offset options for fixed-rate loans.
Can you withdraw money from an offset account?
Yes. An offset account usually functions like a regular bank account, meaning you can withdraw or transfer money whenever needed.
Difference between an offset account and redraw account
| Feature | Offset account | Redraw |
|---|---|---|
| Money location | separate account | extra repayments |
| Accessibility | immediate | bank approval sometimes |
| interest benefit | yes | yes |
| daily transaction use | yes | no |
Offset accounts act like transaction accounts linked to the mortgage, whereas redraw facilities allow borrowers to withdraw extra repayments made on the loan.
It’s important to read the terms and conditions of the offset account carefully and understand all the fees involved. Compare these costs with the potential savings from reduced interest payments on your home loan. In many cases, the benefits of the interest savings outweigh the costs, but this depends on your individual circumstances, such as the balance you maintain in your offset account and the details of your home loan.
Consulting with a financial advisor or a mortgage broker can help you understand the costs and benefits in the context of your personal financial situation.
