How does an offset account work?

What is an offset account? 

You know that pesky interest that’s attached to your Home Loans like an annoying mosquito? An offset account is a transaction account attached to your mortgage like a friendly parrot, and it’s a handy feature that can help you reduce the interest you’re paying on your Home Loans. 

Sounds like a dream? Well, apart from the talking bird on your shoulder, it isn’t. Offset accounts can be useful, but there are few things you need to understand before getting started with one. 

How does an offset account work? 

Offset accounts work by reducing the net balance you’re paying interest on, while allowing you to keep easy access to your money. They come with all the bells and whistles you’d expect from a regular transaction account – you can get a linked debit card, transfer money in and out, and even get your salary paid directly into it. 

If you have a Home Loan of $500,000 and you keep $25,000 of savings in your offset account, you’ll only be paying interest on $475,000. Over the lifetime of your loan, that’s a lot of interest you could avoid paying. 

Although you might only make your mortgage payments monthly, interest is calculated daily and added up. So even if you can only keep some extra money in your offset account temporarily, every day adds up and makes a difference. It’s important to note that offset accounts are normally associated with Variable Rate Home Loans, not Fixed Rate Home Loans.

Helpful tip:

Offset accounts are often only available for variable Home Loans, but you can split your loan so that some is fixed, and some is variable, then set up an offset account for the variable portion and minimise the interest paid on that set amount.

Debbie Shankar

Group Content Manager, Lendi

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

You can generally get a little more bang for your buck in an offset account, because the interest rate on your Home Loan repayments tends to be higher than the interest you would earn in a standard savings account. 

The interest you’d save by using an offset account won’t actually be considered as income, which means you won’t be taxed on it. Interest that you’d earn on a savings account is usually considered income, and means it can be taxed. 

Does an offset account reduce monthly repayments? 

An offset account could reduce how much interest you pay over the lifetime of your loan and could also reduce the length of your loan, but it doesn’t actually reduce how much your regular repayment is. 

Rather, it means more of the money you pay goes towards the principal part of your loan rather than the interest. 

Let’s say your Home Loan is $500,000 and your repayments are $3,200 per month. That $3,200 minimum repayment is calculated based on paying principal and interest on the full $500,000. 

If you have $20,000 in savings which you keep in your offset account, you’ll only be paying interest on $480,000, which means that a little bit more of your payment will go towards the principal. The effects add up over time and as you chip away at your principal sum bit by bit, you could end up paying a lot less interest, and even reduce the term of your loan. 

What are the benefits of an offset account? 

Offset accounts come with more flexibility and can have great advantages if you use it correctly.

Reduce the interest you pay on your loan

Keeping as much money as you can in your offset account will reduce the principal that your interest is calculated on, which means more of your payments go towards paying off the interest.

Pay off your loan sooner

It’s a flow on effect with a big long-term impact. Paying less interest means paying off more of your principal, which means paying even less interest later, and so on, eventually even reducing the term of your loan.

Put your savings to work

The interest you pay on Home Loans is usually higher than the interest you would receive in a savings account. Keeping your savings in an offset account will usually save you more than you would earn. Not to mention, any interest you earn will be taxed. Interest you avoid paying will not get taxed.

Be prepared for a rainy day

Keeping the bulk of your savings in an offset account means that if something comes up and you need to access it quickly, you can. Unlike redraw accounts and term deposits, which may come with fees, limits, or delays.

Helpful tip:

If you’re serious about making the most of your offset account and are generally good at managing your spending, you could put all your regular bills onto a credit card and pay it each month from your offset account. That way, your money can sit in your offset and reduce your payable interest for as long as possible. These tweaks might feel small, but getting to the habit of them can make a large difference over the lifetime of your loan.

Debbie Shankar

Group Content Manager, Lendi

What are the disadvantages of an offset account? 

Although it might seem like we’ve been singing the praises of talking parrots and offset accounts so far, there are a few potential disadvantages to be aware of.

Higher fees or interest rates

Some lenders may charge higher for additional fees or interest rates for offset accounts. Depending on how much you can keep in your offset account, the higher rates and fees may or may not still be worthwhile for you.

Limited to variable interest rates

Offset accounts are usually only available on variable interest rate loans, which can make it harder to predict whether having an offset account is the right choice for you.

It’s not automatically worth it

If you only have a small amount of money you can keep in your offset account, it’s not likely to make a long term difference.

What are the different types of offset accounts?

Not all offset accounts are structured the same way. Broadly speaking, offset accounts can be fully or partially offset. Let’s take a look at the difference between the two.

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

Offset accounts and redraw facilities are both common features of Home Loans and while they have some similarities, there are key differences which can make one more suited to you than the other. 

• Offset accounts allow you full access to your money, similar to any transaction account. Redraw facilities may require you to apply for a redraw and may have minimum and maximum limits. 
• Some providers may offer Home Loans with redraw facilities at lower interest rates than offset accounts, however this often changes. 
• Offset accounts allow you to deposit any savings you have while a redraw facility only allows you access to payments you’ve made on top of your minimum scheduled repayments. 
• While offset accounts often have a monthly or annual fee, you may be charged a fee every time you withdraw money from your redraw facility.
• Yes, your money is more accessible in an offset account, but is that always a good thing? The application process of a redraw facility can be an added incentive to keep saving. 

Where can I compare options for Home Loans with offset accounts? 

At iSelect we’ve partnered with Lendi to make it easier to find a great deal on your Home Loans. Click here to get started comparing from a range of lenders online*.