An offset account can be a powerful tool in reducing your home loan interest.

Learn more about offset accounts and home loans, before u loan.

What is an offset account?

An offset account is a transaction or savings account linked to your home loan. The balance in this account is used to offset the interest payable on your mortgage. Essentially, you're earning interest on your savings while simultaneously reducing the interest on your home loan.

The mechanics of an offset account are surprisingly simple. Let's say you have a home loan of $300,000 and an offset account with a balance of $20,000. Instead of paying interest on the full $300,000, you'll only pay interest on $280,000. The $20,000 in your offset account "offsets" or reduces your outstanding loan balance for interest calculation purposes.

Using an offset account wisely can yield significant savings over the life of your loan. Here are some strategies to consider:

  • Regular deposits – Make frequent deposits into your offset account, including your salary, windfalls, or other income sources.
  • Daily spending – Use the linked transaction account for everyday spending. The balance in this account contributes to offsetting your loan.
  • Keep savings separated – Maintain a clear distinction between your spending money and savings. This ensures that your offset account balance remains high.

If your offset account balance exceeds your home loan balance, you won't pay any interest. In fact, some lenders even allow you to earn interest on your offset account savings. The reason you would leave money in an offset account instead of making extra payments on your loan, is so you can still access that money if you need it for something else.

When we talk about 100% offset or full offset accounts, we are referring to offset accounts which use every dollar in the account to offset your loan. These are typically available for variable rate loans. Alternatively, when we talk about partial offset accounts, only a portion of your account balance offsets your mortgage.

Pros and cons of an offset account home loan

Pros
  • Reduced interest – An offset account reduces the amount of interest you pay on your mortgage.
  • Flexibility – Your offset account is a transaction account, providing easy access to your funds.
  • Tax benefits – The money you save on interest is not considered taxable income.
Cons
  • Fees – Some lenders charge fees for maintaining offset accounts.
  • Interest rates – Offset account home loans may have slightly higher interest rates compared to standard loans.
  • Potential overspending – If you're not disciplined, having easy access to your savings could lead to overspending.

Things you need to know about offset accounts

  1. Not all offset accounts are created equal – Different lenders offer varying degrees of offset account flexibility, so it's essential to find the right fit.
  2. Interest calculation – Offset accounts usually use daily interest calculations, which can be highly beneficial in reducing your interest payments.
  3. Linked accounts – It's crucial to have a transaction or savings account linked to your offset account to maximise its benefits.

Is it better to keep money in the offset account or pay down the mortgage?

The decision ultimately depends on your financial goals and situation. If you have excess funds, it might make more sense to use them to reduce your loan balance, which permanently saves you on interest. However, keeping a balance in your offset account while also paying down your loan can offer a balanced approach.

How to know whether an offset account is best for me?

The best way to determine if an offset account suits your needs is to consult with a mortgage broker. They can assess your financial situation and advise on whether an offset account aligns with your homeownership goals.

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