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What is a mortgage offset account & how do they work?

This article was originally written by TJ Ryan.

A mortgage offset account may be able to help you pay less interest. Here’s our guide to mortgage offset accounts and how they work.

What is an offset account?

An offset account is a savings account or transaction account linked to your home loan account. The account’s balance is ‘offset’ daily against your home loan balance, and as a result you’re only charged interest on the difference between the two.

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 may be linked to either a variable rate loan or a fixed rate loan. Some home loans may specify that the offset applies for a fixed term, such as a 100% offset against a 1-year fixed rate loan.

How does an offset account work?

Offset accounts work by offsetting the balance of the linked savings or transaction account against the balance of the linked loan. In the case of a mortgage offset account, the balance of the account reduces the balance of the mortgage that incurs interest. For example, if you had a loan of $350,000, with $100,000 in a linked offset account and $100,000 repaid, you may only pay interest on $150,000 of your balance, depending on the type of offset account you have.

Source: Canstar (YouTube)

Variable Home Loans Featuring Offset Accounts

The table below displays a snapshot of the lowest rate variable home loan products with offset accounts available on Canstar’s database and links to providers’ websites. The table is sorted by the current rate (lowest-highest), then by provider name (alphabetically).

Before committing to a home loan product, check upfront with the provider to confirm the details of the offset account and whether the product meets your needs.

Based on residential variable home loans available for a loan amount of $500,000 in QLD at 80% LVR and principal and interest repayments. *Read the Comparison Rate Warning.

3 Years Fixed Home Loans Featuring Offset Accounts

The table below displays a snapshot of the lowest rate 3-year fixed home loan products with offset accounts available on Canstar’s database and links to providers’ websites. The table is sorted by the current rate (lowest-highest), then by provider name (alphabetically).

Before committing to a home loan product, check upfront with the provider to confirm the details of the offset account and whether the product meets your needs.

Based on residential 3-year fixed home loans available for a loan amount of $500,000 in QLD at 80% LVR and principal and interest repayments. *Read the Comparison Rate Warning.

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Types of offset accounts

There are two types of offset accounts:

  • Balance offset account: The most common type of offset account, these accounts offset the interest payable on the mortgage by the balance of the account. The percentage of the balance that will be offset can range right up to 100%. However, a partial offset account may only offset your mortgage by a portion of the balance, for example, a 50% offset account will only offset the interest bearing portion of your mortgage by 50% of your offset account balance. So the higher the percentage of the mortgage account, the more you will save in interest on your mortgage.
  • Interest offset account: These accounts offset the interest payable on your mortgage by the interest earned in the account. However, this could be substantially less than the interest rate of the mortgage. These accounts are likely to be significantly less favourable, but they are also less common. 

Pros and cons of an offset account

First, by having a decent amount of 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 – every cent in your offset account is saving you money in interest off your loan.

Secondly, an offset account is easy to manage. You could have your salary deposited into a standard savings account or transaction account every payday, and if it was linked as an offset account to your loan it would automatically save you money on your monthly interest payments.

Thirdly, having an offset account is an easy way to keep excess funds at hand while still minimising your interest payments on your mortgage, so if your financial situation changes you will be able to easily access the money that has been offsetting your mortgage, rather than needing to make a redraw on extra repayments you have made, which can be limited to minimum amounts and/or come with fees.

Finally, an offset account offers flexibility should you need it. If something unexpected like a medical emergency or a car crash requires you to pay a chunk of money, you have that money readily available, so you can access it as easily as if it was in your everyday transaction account.

Offset accounts can be a great tool for some home owners, particularly with the flexibility they can provide. They can also potentially save you money and cut time off your mortgage.

However, keep in mind you may find yourself either paying an additional fee for a loan with an offset account, or alternatively, you could end up paying a higher interest rate on your mortgage. The financial benefit 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. So, it is important to weigh up your individual circumstances and determine if an offset account is right for you.

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How much could you save using an offset account?

An offset account can be a great way to save thousands of dollars in interest on your home loan.

As a purely hypothetical example, Canstar has calculated the benefit of holding either $20,000 or $40,000 in a mortgage offset against a $300,000 home loan.

As this table shows, even a small amount of savings stored in an offset account can save you thousands of dollars in interest over just 3 years, allowing you to repay more of your loan amount faster. When you repay your loan faster, you pay even less in interest over the life of your loan.

Table: Interest paid on a $300,000 loan over 3 years
Product Interest Rate Monthly Repayment Amount owing after 3 years Interest paid over 3 years Amount repaid after 3 years
Variable 4.77% $1,568.56 $285,476.22 $41,944.40 $14,523.78
Variable with $20,000 in offset 4.77% $1,568.56 $282,405.86 $38,874.04 $17,594.14
Variable with $40,000 in offset 4.77% $1,568.56 $279,335.50 $35,803.68 $20,664.50
Source: www.canstar.com.au

Are your monthly repayments the same with an offset account?

As you can see from the table above, when you have an offset account, your monthly repayments stay the same in dollar amounts. However, this is a good thing because it means you can repay your loan faster.

Each month, more money is going towards paying off the principal (your loan amount) because the offset amount is reducing how much interest you owe. Instead of wasting your money every month paying so much interest, you’re putting more of your money towards repaying your loan faster.

How to choose an offset account

When choosing a home loan that allows an offset account, look for:

  • 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 and 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, e.g. debit card, ATMs, EFTPOS, BPAY, direct debit, and in-branch.
  • The ability to link multiple accounts as offset accounts to your loan.
  • An equal savings interest rate to your mortgage.

The last dot point is particularly important if your mortgage is only offset by the interest earned in your offset account. If you’re earning interest on the savings in your offset account, you don’t earn interest in the traditional sense, but rather you are offsetting the interest of your mortgage and as do not earn additional income, as such, these benefits are tax-free, unlike the earnings in a traditional savings account.

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Offset account or redraw facility?

Offset accounts and redraw facilities are both common features of a home loan, and it is important to know which would work best for you:

  • Money sitting in an offset account remains at call and accessible, whereas you must make an application to withdraw money using a redraw facility, so it isn’t accessible the same day.
  • An offset account just holds 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, compared to the redraw fee that is charged to redraw money from your loan.
  • Offset accounts require discipline to save money instead of spending it, while redraw facilities enforce discipline because you have to apply in advance if you want to redraw money to spend.

Learn more about the difference between offset accounts and redraw facilities here.

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Offset account or savings account?

When it comes to paying off a home loan and paying less in interest, an offset account can be more effective than putting the same amount of money into a savings account, for several reasons.

First, the interest earned on a savings account is typically much less than the interest rate on a home loan, so you couldn’t earn enough savings interest to completely offset the home loan interest rate:

Home Loan Standard Variable Interest Rate Savings Account Bonus Interest Rates
Minimum 3.44% p.a. 0.20% p.a.
Average 4.45% p.a. 1.69% p.a.
Maximum 5.82% p.a. 2.65% p.a.
Source: www.canstar.com.au. Based on home loans and savings accounts on our database as at 1 October 2018.

The search results do not include all home loan providers, and may not include all features relevant to you. Based on residential loans available for $400,000, 80% LVR and principal & interest repayments.

Savings account interest rates based on a deposit balance of $10,000 and paying a total rate of at least 0.1% p.a.

Secondly, when you have an offset account, it is as if the full balance of those savings are being used to pay off your loan. A savings account that is not linked as an offset to your home loan provides no such benefit.

Other ways to save money on your home loan

Being mortgage-savvy could potentially save most homeowners up to hundreds of thousands of dollars over the life of their loan. Here are some tips to help improve your home loan saving strategies:

  1. Secure a lower interest rate: Do some research on the Canstar website to find out what interest rates you should be paying, then negotiate a lower interest rate with your current lender or consider 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.
  4. Pay fortnightly: With 26 fortnights in a year compared to only 12 months, paying fortnightly is a sneaky way to pay extra off your mortgage without really noticing because you’re basically making an extra repayment each year.

For more information on how to save money for a home loan, have a look at this Canstar article.

Or check our range of Home Loan Calculators to get a better handle on your financial situation.

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