How do offset accounts work & are they worth it?

In the habit of saving? An offset account can be a powerful tool for mortgage holders, allowing them to use their savings to reduce interest costs. By leveraging an offset account, homeowners can potentially save thousands of dollars and shorten the life of their mortgage. Here's how it works.

What is an offset account?

An offset account is connected to a home loan, and the balance of the offset account is used to 'offset' the principal balance of a home loan when a borrower's interest liability is calculated. So, if you keep money in an offset account, less of each of your mortgage repayments will go towards paying interest.

With an offset account, borrowers can save on interest without needing to make extra repayments on their home loan. The funds in the account are fully accessible, allowing the borrower to withdraw money at any time - most offset accounts even come with a debit card.

What are the benefits of an offset account?

An offset account can be one of the most advantageous features of a home loan, although it often comes with fees and conditions to consider. Here are some of the key benefits you may gain from having an offset account.

Keeps funds accessible

An offset account functions just like a transaction account, meaning the money sitting in it is easily accessible. This is unlike a redraw facility, where funds may have withdrawal limits or restrictions.

Can reduce your interest costs

The higher the balance in your offset account, the less interest you pay on your mortgage. This can result in substantial savings over the life of your loan.

Check out the below example of a mortgage holder with $50,000 saved who chose to use an offset account compared to another who didn't:

	Offset account	No offset account
Principal balance	$600,000	$600,000
Offset account balance	$50,000	-
Interest rate	5.00% p.a.	5.00% p.a.
Monthly Repayment	$3,221	$3,221
Time to pay off home loan	25 years	30 years
Total interest paid	$422,088	$559,535
Savings over 30-year loan term	$137,447	$0

Can help you pay your home loan off sooner

Keeping funds in an offset account doesn't reduce the size of your regular repayments, rather it sees less of your repayments used to pay interest and more used to pay down your principal balance. Over time, this will help to pay your home loan off sooner.

Interest saved isn't taxed, unlike interest earned on a savings account

Interest earned on a regular savings account is considered taxable income. However, the interest savings achieved through an offset account aren't taxed.

How to use an offset account

Whether you're a saver or a spender, you'll likely benefit from using an offset account. Here are some strategies that could help you make the most of the feature:

1. Keep your savings in the offset account
   Instead of keeping your savings in a separate account, keep them in your offset account. Every dollar you have in your offset account directly offsets your home loan balance, helping you save on interest costs.

2. Deposit your salary into the account
   Since home loan interest is typically calculated daily, depositing your salary directly into your offset account allows you to make the most of every dollar from the moment it arrives.

3. Use it as your primary transaction account
   Consider using your offset account as your main spending account. By using it for everyday transactions, you maximise the time your funds offset your home loan balance, ultimately helping you save more on interest.

4. Time your expenses
   Planning your expenses to keep your cash in the offset account for as long as possible can enhance your savings. Adjusting the timing of bill and subscription payments to coincide with their due dates helps maintain a higher balance for longer.

Partial & full offset accounts: What's the difference?

There are two types of offset accounts: partial and full offset, and one offers greater benefits than the other.

If you have a full offset account, sometimes called a 100% offset, the entirety of every dollar in your offset account will be used against the balance of your home loan.

If you have a partial offset account, on the other hand, only a set portion of each dollar kept in your offset account will be used to offset your principal balance.

How does an offset account differ from a redraw facility?

While both offset accounts and redraw facilities can help you pay less interest on your mortgage, the difference lies in the accessibility of funds.

An offset account is like a normal savings or transaction account, where money can be withdrawn whenever needed.

A redraw facility allows a borrower to access any extra repayments they've made on their home loan. Making extra repayments can provide the same interest-busting benefits of an offset account, but many lenders impose minimum redraw amounts, limit how often borrowers can redraw the extra funds, or charge redraw fees.

Furthermore, because the funds you put into your redraw facility are considered extra repayments, if a borrower repays the entire value of their home loan, their lender will likely close the mortgage facility, locking those funds away forever. Or at least until the homeowner takes out another loan against their property.

See also: Refinancing your home loan to access equity

Are offset accounts worth it?

There is one notable drawback to having an offset account: The cost.

While many lenders don't charge a borrower extra for an offset account, plenty do. Moreover, some lenders only offer offset accounts on their premium home loans, which may come with higher interest rates or additional fees.

Depending on the market at any given time, you might find the most competitive home loans don't come with offset accounts at all. If that's the case, it's wise to crunch the numbers to determine whether the interest savings from an offset account justify the higher rate or extra fees.

The final aspect that might make an offset account less attractive to a borrower is also one of its benefits: ease of access to funds. If you're someone who struggles with spending discipline, keeping your spare funds in a less accessible facility could be a wiser option.

Some of the market's most competitive offset home loans

Want a home loan with an offset account? Here are some of the lowest rate options available right now:

Important Information and Comparison Rate Warning

 

_{Originally written by Gerv Tacadena in May, 2022. Last updated by Brooke Cooper in November 2024.}

_{Image by freepik.}