What is an offset account?

ELLIE MCLACHLAN
An offset account may help you pay less interest on your home loan. Here’s our guide to mortgage offset accounts and how they work.


What is an offset account?

An offset account is a transaction account that is linked to your home loan. The account’s balance (or a proportion of that balance) is ‘offset’ daily against your home loan balance. As a result, you’re only charged interest on the difference between the total loan balance and the amount offset.

This means the lender charges you less in interest because they are not charging you interest on the full, actual remaining balance of your loan.

Offset accounts are more commonly linked to a variable rate home loan, but they can also be linked to a fixed rate home loan. It’s a good idea to check with the lender to see what conditions or limitations may apply.

How does an offset account work?

Offset accounts work by using up to 100% of the balance of a linked transaction account to ‘offset’ or effectively reduce the portion of your home loan that is accruing interest. For example, if you had a loan with a balance of $350,000, with $50,000 in a linked 100% offset account, you would only pay interest on $300,000 of your balance. But in most other respects, an offset account works just like a regular transaction account with an account number and BSB number, enabling you to deposit funds (like your salary) and make withdrawals and payments using methods such as online transfers, tap and pay with a debit card or smartphone, or BPAY.

Source: Canstar (YouTube)


Variable home loans with offset accounts

If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value and that offer an offset account. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.

*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning.

Types of offset accounts

There are two main types of offset accounts:

  1. 100% offset account: This offsets the interest payable on the linked mortgage by the full balance of the account. This may be available for variable or fixed rate home loans.
  2. Partial offset account: This only offsets your mortgage by a portion of the offset account balance. This means the higher the percentage of the offset account, the more you will save in interest on your mortgage. For example, if you had a loan of $350,000 with $50,000 in a linked 50% offset account, you would only pay interest on $325,000 of your balance. This is typically more common for fixed rate home loans.

What are the pros and cons of an offset account?

Pros:

  • Pay less interest on your home loan: By having money in your offset account, you might effectively cut years from your home loan and pay thousands of dollars less in interest. You don’t necessarily need a huge amount of spare savings, though – with a 100% offset account, every cent in your offset account is saving you money in interest off your loan.
  • Get your savings to work harder for you: Your home loan interest rate will typically be higher than the interest rate you earn on a savings account. Therefore, your savings may work harder for you in an offset account compared to a regular savings account. Additionally, the Australian Taxation Office (ATO) says the interest you save using an offset account will not be taxed. In comparison, the ATO says that the interest you earn on a savings account is taxed.
  • Keep extra funds at hand: An offset account can be an easy way to keep excess funds at hand, while still minimising interest payments on your mortgage. If your financial situation changes or if something unexpected like a medical emergency happens, you may be able to easily access the money offsetting your mortgage.

Cons

  • Potential for higher fees: You may find yourself paying an additional fee for a loan with an offset account.
  • Potential for higher interest rate: Alternatively, you could end up paying a higher interest rate on your mortgage.

The financial benefits of a mortgage offset account will depend on a number of factors, such as the interest rate and fees of comparable loans (with or without an offset facility) and how much money you are likely to keep in your account. It’s important to weigh up your individual circumstances and determine if an offset account is right for you.

How much can you save with an offset account?

If you maintain a sufficient balance, an offset account could help you save thousands of dollars in interest and cut years off your home loan.

As a hypothetical example, Canstar has calculated the benefit of holding either $20,000 or $40,000 in a mortgage offset account against a $400,000 home loan.

As this table shows, even the smaller offset balance could save you thousands of dollars in interest over just three years.

Impact of offset account on a $400,000 variable loan

The table below shows the impact of an offset account with various balances on a hypothetical home loan.

← Mobile/tablet users, scroll sideways to view full table →

Amount in offset

Home loan interest rate Monthly repayment First three years Total loan term

Interest paid

Amount repaid Interest paid

Time to repay

$0

3.39% $1,772 $39,500 $24,281 $237,815

30 years

$20,000 3.39% $1,772 $37,363 $26,419 $204,819

28 years 6 months

$40,000 3.39% $1,772 $35,225 $28,557 $175,949

27 years and 2 months

 

Source: www.canstar.com.au. Repayment and interest calculations assume a total loan term of 30 years, and that the offset account balance is held constant at the applicable amount for the entire loan term.

Does an offset account reduce monthly repayments?

When you have an offset account, your monthly repayments typically stay the same in dollar amounts, even though you may be charged less in interest overall.

You may be able to repay your loan faster, because with an offset account helping to reduce the amount of interest being added to your loan, more money is going towards paying off the principal (your loan amount) rather than interest with each home loan repayment.

How can I use an offset account?

The more money you put into an offset account, the more interest you will typically save on your loan. To help maximise the balance of your offset account, one option is to get your salary deposited directly into your offset account and then use the account as an everyday transaction account.

Because your home loan is offset on a daily basis, the longer you keep your money in an offset account, the more interest you could save. If you have a credit card and are disciplined with your spending and repayments (i.e. you repay the card balance in full each month), then another option some lenders suggest is to use your credit card to pay for your everyday expenses. The theory is this could help you keep money in your offset account for longer and save more interest on your home loan. However, this approach can be quite risky and may not be suited to everyone. For example, you would need to make sure you repay your credit card in full and on time each month. Also, you would need to avoid unnecessary spending that could make the repayments less manageable. Such spending could also lead to you building up debt that would incur interest or monthly fees that would likely far outweigh any savings made through your offset account. It could also help to factor in any other credit card fees too, such as the annual fee, before deciding if this approach is suitable.

How can I choose an offset account?

When choosing a home loan with an offset account, consider features such as:

  • An account where 100% of your total balance is offset against your loan.
  • No minimum balance, so every cent in your offset account is working for your loan.
  • No maximum balance limit, so you can keep growing your savings and paying less in interest on your home loan.
  • Low or no fees on the offset account.
  • The ability to use your offset account for the transaction types you need, such as debit card, ATMs, EFTPOS, BPAY, direct debit and in-branch.
  • The ability to link multiple accounts as offset accounts to your loan.

It’s also important to consider the home loan interest rate carefully. In reality, particularly early in your loan term, your home loan balance is likely to be significantly larger than your offset balance, so having a competitively priced home loan could make a significant difference too. Saving up a larger deposit for your home may also save you considerable money during the lifetime of your loan too.

What’s the difference between an offset account and a redraw facility?

Offset accounts and redraw facilities are both common home loan features. However, there are some differences and it is important to consider which would work best for you:

  • Money sitting in an offset account generally remains accessible whenever you need it, whereas you need to make an application to withdraw money using a redraw facility, so it isn’t always accessible the same day. There may also be minimum and maximum redraw amounts.
  • An offset account can hold any spare savings you have, while a redraw facility is only available for any additional repayments you have made above and beyond your usual monthly repayments. You can only ‘redraw’ the extra that you have already paid.
  • Offset accounts may have low or no account-keeping fees and some transaction fees. Fees may apply when using redraw facilities in some situations.
  • As it’s easier to access money in an offset account, it’s also easier to spend it, so a redraw facility may be more suitable if needing to apply in advance to redraw money helps you to minimise – or prevent – any unnecessary spending.
  • There may be different tax implications if you are an investor. The interest charged on an investment loan may be tax-deductible. However, according to the ATO, if you redraw from that loan and use the money for non-investment purposes, this may not be tax-deductible. In comparison, withdrawing money from an offset account typically will not affect the tax treatment of the interest charged on the loan. You may want to seek tax advice for more information on this.

What’s the difference between an offset account and a savings account?

The main difference between an offset account and a savings account is what happens with interest. With a savings account, you generally earn interest on the balance of the account, whereas with an offset account your balance works to help you save on interest that you otherwise would be paying on your home loan. An offset account also generally offers more transaction options than a savings account would, as you can generally use it for everyday payments using a debit card, tap and pay and other payment methods. With an offset account, you also generally won’t have to deal with the kinds of interest penalties that can apply on some savings accounts if you make withdrawals or do not grow your balance month-on-month.

What are some other ways I can save money on my home loan?

Being mortgage-savvy could potentially save you tens of thousands of dollars over the life of your home loan, depending on the loan size and savings techniques used.

Source: Canstar (YouTube)

Here are some ideas that could be worth weighing up that may help improve your home loan saving strategy:

  1. Secure a lower interest rate: Do some research to get an idea of what interest rates are available for home loans with the features you are looking for, then consider negotiating a lower interest rate with your current lender or refinancing. Also, check you’re not paying too much in fees.
  2. Keep your repayments the same: If you get a lower rate, maintaining your monthly repayments at their previous level will help you repay your loan faster and save money on interest over the life of your loan.
  3. Increase your regular payments: Making an effort to put some extra spare cash towards your mortgage (additional repayments) each month can help you repay your loan faster. You might like to try Canstar’s extra home loan repayments calculator to see how much you could save.
  4. Pay fortnightly: With 26 fortnights in a year compared to only 12 months, paying fortnightly could be a way to pay extra off your mortgage as you are essentially making an extra monthly repayment each year. Lenders may take different approaches to calculating your loan repayments, so it’s a good idea to check with them directly.

You can also check out our range of Home Loan calculators to help you get a better understanding of your financial situation.

Additional reporting by Tamika Seeto.

Main image source: MK photograp55 (Shutterstock.com)


Thanks for visiting Canstar, Australia’s biggest financial comparison site*

This content was reviewed by Deputy Editor Sean Callery as part of our fact-checking process.


Ellie McLachlan is responsible for leading and breaking financial news on home loans, savings and much more. Ellie studied a Bachelor of Journalism and Arts at UQ and has worked at major metropolitan and regional news organisations.

Share this article