Offset account

Having an offset account that’s linked to your home loan can be a useful feature to access while you’re paying off your mortgage, but there are a few things to understand before you open one.

What is an offset account?

It’s a bank account that’s linked to your home loan, and from which you can make transactions. Offset accounts are usually associated with variable rate home loans, as opposed to fixed rate home loan products.

How does an offset account work?

The key to an offset account is that lenders deduct the amount of money sitting in your offset account from the loan principal when determining your interest repayments.

So, if you’ve got $500,000 to pay off on your home loan and you’ve put $10,000 in your offset account, then you’ll be charged interest on $490,000 on your home loan.

Offset accounts work as a standard transaction account where you can make payments and withdrawals as you would with your debit card.

What could I use an offset account for?

Using an offset account can be a helpful way to reduce interest on your home loan repayments. It can also depend on the type of offset account you choose.

Types of offset accounts

• 100% offset account: The balance in a 100% offset account totally offsets the interest that you would otherwise need to pay on the amount in your linked home loan account.

  This can generally be used for either variable or fixed rate home loans.

• Partially offset account: The balance in a partially offset account only offsets a portion of the interest you would need to pay on the amount in your linked home loan account.

  For example, think about that $500,000 home loan we mentioned earlier. If you put $10,000 in a 50% partially offset account, then you would pay interest on $495,000 of your home loan.

  This is more commonly used for fixed rate home loans.

What are the pros of an offset account?

• You could pay less interest: By depositing money into a 100% offset account and making regular repayments on your home loan, you could save hundreds or even thousands of dollars throughout the lifetime of your home loan.
• No tax on offset interest savings: Since interest rates on home loans can be a lot higher than interest rates on savings accounts, you could see some benefits if you deposit your savings into your offset account.

  By doing so, the Australian Taxation Office typically won’t tax you on the interest you save in this situation. This is because money in your offset account does not earn interest, and is therefore considered non-taxable.

• Extra funds available in times of need: If you ever find yourself in an emergency situation where you need to pay for urgent car repairs or medical bills, then you have the option to withdraw money from your offset account.

What are the cons of an offset account?

• You could incur higher fees: Some lenders charge an additional fee for opening and using an offset account, so make sure it’s something that you can afford if you decide to open one.
• You could incur a higher interest rate: As things tend to go with variable loans, you could end up paying a higher interest rate on your home loan.
• Depositing a small amount in your offset account isn’t automatically worth it: If you only put a small amount of money in your offset account, then it’s unlikely you will be ‘offsetting’ the interest on your home loan repayments in the long term.

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

These are both common features of home loans, but there are some key differences that may suit you better than others:

• In an offset account, you’re able to access the money you deposit any time, whereas you’d typically need to apply for a redraw. Redraw facilities may also have minimum and maximum limits.
• Offset accounts allow you to deposit any savings you have, while a redraw facility is only permitted for additional payments you make that go above your 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.
• Money can be easier to access in an offset account, but it can also mean that it would be too easy to withdraw those funds. As a redraw facility often requires an application to withdraw funds, this could be an added incentive for you to minimise spending and keep saving.

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.

Can I switch to a home loan with an offset account by refinancing?

Yes, you can! You can start by comparing home loans with iSelect and Lendi and see if you can find a home loan with features that suit you.

Where can I start comparing home loans?

At iSelect we’ve partnered with Lendi to make it easier to find a great deal on your home loan*. Click here to get started comparing from a range of lenders online, or give Lendi a call on 1300 186 260.

Last updated: 6/12/2021