Compare home loans with offset accounts from 5.99%

What is a mortgage offset account?

An offset account functions similarly to a typical transaction account, except it's linked to a person's home loan. The funds kept within an offset account can reduce the home loan interest payable, potentially helping to shorten the mortgage's life.

For example, if you have a loan balance of $300,000 and keep $100,000 in an offset account, you might only pay interest on $200,000.

Typically, offset accounts are only offered on variable rate home loans, but some lenders do provide this feature on fixed rate packages.

How does a mortgage offset account work?

Offset accounts operate like a cross between a transaction account and a savings account. However, instead of earning interest on the funds kept in an offset account, a borrower can save interest by keeping cash in an offset account.

The balance in the offset account, which can generally be used like a transaction account, is used to 'offset' the outstanding loan amount. Essentially, the lender will act as if the borrower has repaid the funds within the offset account and reduce the interest charges accordingly.

A common misconception, however, is that keeping funds in an offset account will reduce the size of a person's repayments. That's not the case. Rather, it will reduce the portion of a person's repayments that go towards interest and increase the portion that goes to paying off the principal. Therefore, a borrower might find they repay their home loan faster by utilising the feature.

When you apply for a home loan, you might be able to request to have an offset account linked to it. You can deposit your savings, salary, or any other funds into your offset account.

The balance in this account is then subtracted from the outstanding loan amount when your lender calculates interest charges. You'll likely also be provided with a debit card attached to your offset account, allowing you to pay for everyday expenses, bill payments, or any other financial needs directly from the account.

Keep in mind, however, that the more money you keep in the offset account, the greater the interest savings on your home loan.

Additionally, lenders often charge an extra fee or a higher interest rate to borrowers who want offset accounts, so take the time to ensure any savings you realise are enough to recoup the cost of having the account.

What are the types of mortgage offset accounts?

Not all home loan offset accounts are created equal. There are two common types of offset accounts: 100% offset accounts and partial offset accounts.

As the names suggest, 100% offset accounts consider all the funds kept in the account when offsetting the principal balance of a home loan, while partial offset accounts only consider a portion of the funds.

Accounts that offset 100% of the balance are more common, but it's important for borrowers to check how much of their savings will actually help reduce their interest expense.

Some partial offset accounts also reduce interest payable at a lower rate than that charged on the home loan. For example, your home loan might have an interest rate of 5% p.a., but your offset account might only reduce interest payable at a rate of 3% p.a., leaving a 2% p.a. gap.

How much can you save with a mortgage offset account?

How much you can save by strategically using an offset account depends on three factors: your loan balance, how much cash you can deposit, and the current interest rate on your loan.

To illustrate, let's assume you have $500,000 outstanding on your home loan, a mortgage interest rate of 6.75% p.a. with a 30-year term, and $25,000 to deposit. Let's also assume your offset balance remains the same over the life of the loan.

The table below shows a simple calculation of the interest you would pay with and without an offset account. The calculations are made using Your Mortgage's home loan repayment calculator.

So, if you've found yourself in the scenario depicted above and your offset account's balance, interest rate, and loan terms remain the same over the life of your mortgage, you might save yourself more than $137,000 in interest and pay your loan off three years earlier by keeping $25,000 in an offset account.

There might be potential for even greater savings, however. Interest in an offset account is typically calculated daily. This means that if you regularly add to your offset account, even if solely to deposit your salary before you spend it, you'll realise some savings.

Advantages of an offset account

Here are the advantages of using an offset account:

Interest savings

The primary advantage of an offset account is the potential interest savings it offers. By depositing funds into the offset account, you will be able to reduce the interest charged on your home loan.

Flexibility

Funds deposited in the offset account remain accessible, allowing you to withdraw or deposit money as needed. This flexibility might be particularly beneficial for those with an irregular income or when unexpected expenses pop up.

Repay mortgage faster

If a borrower were to funnel their interest savings back into their home loan by making additional payments towards the principal amount, they can speed up the process of repaying their home loan.

Tax efficiency

Unlike the interest earned on regular savings accounts, money saved through the use of an offset account isn't taxable.

Disadvantages of an offset account

As with anything, there are downsides to using an offset account.

Extra costs

Perhaps the biggest disadvantage of having an offset account is that many lenders demand extra fees for providing them, or they might charge a higher interest rate on home loans with offset accounts.

Need a decent balance

As mortgages with offset accounts generally cost more than those without, it's important that a person considering taking on an offset account deposits enough to recoup those costs and still come out in the green.

Financial discipline

Offset accounts work best when you consistently maintain a positive balance. If you struggle to save or you tend to dip into your savings regularly, an offset account may not be the most effective option for you.

Tips to make the most of your offset account

Making regular deposits and keeping the funds in your offset account intact is perhaps the best way to take advantage of your offset account.

Consistently depositing funds into the offset account ensures a growing balance, leading to more significant interest savings. Consider automating regular deposits to make it easier to stay on track.

You can also have your salary credited to your offset account. However, depending on your level of financial discipline, you might be better off avoiding using it for day-to-day transactions, especially if you're prone to spending more than you would like.

Seeking professional advice on managing your money can also be beneficial. A qualified financial advisor or mortgage broker can provide personalised guidance based on your unique circumstances and help you determine if an offset account is the right choice for you. Any fees they charge might be recouped through the savings realised after implementing their advice.

Offset accounts can be advantageous for astute Australian borrowers. However, it's crucial to consider the disadvantages, such as higher interest rates and extra fees. By carefully weighing the pros and cons and considering how an offset account could help you meet your goals, you can make an informed decision about whether an offset account is the right financial tool for you.