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What is an offset account, and how can it save you money?

Woman crunches the numbers on her budget for her offset account.

One of the more popular home loan features is an offset account. This useful tool help lower the amount of home loan interest you pay over the life of your mortgage. 

But what exactly is it? And how can you get the most out of it? 

What is a home loan offset account?

An offset account is just like an everyday bank account, except it is linked to your home loan. You can have your salary deposited into the account, use it to store savings, or set up direct debits for any bills. 

When you open an offset account, you will receive a debit card from your home loan lender, which you can use to make everyday purchases.

The major benefit of using an offset account is the balance will be offset daily against the home loan principal, bringing down the amount of interest you pay. For instance, if homeowner Lisa has a $500,000 home loan and $50,000 in an 100% offset account, she will only be charged interest on $450,000.

How much can an offset account save me?

An offset account has the potential to save you a lot of money, but it just depends how you use it. An offset with a sizeable balance not only reduces the amount of interest you pay, but the length of the home loan term as well.

Let’s use the same home loan scenario as above. Lisa maintains a balance of $50,000 in her offset account over the life of her 30-year home loan with a 5% interest rate. By doing this, she can save around $142,000 in interest and pay off her loan four years and four months earlier.

Which home loans come with an offset account?

Most variable rate loans come with an offset account, but they are not so common among fixed rate options. Among the few fixed rate loans that do offer an offset account, many are only partial or require you to pay a fee.

However, some split loans, which divide your loan into fixed and variable rate accounts, allow you to have an offset account on the variable portion.

For instance, say Lisa decides to fix $200,000 of her home loan and leave $300,000 variable. Because she has $50,000 in an offset account, she will only be charged interest on $250,000 of the variable portion.

Offset account vs extra repayment facility

Another feature to lower the interest you pay on your home loan is an extra repayments facility, which allows you to deposit extra money into your home loan.

The main way you make extra repayments is to simply add more to your monthly repayments, usually by direct debit. An extra repayment can be as small as $20 more per month.

But which feature is better for you: an offset account, or extra repayments?

Here are the pros and cons of each.

Offset account

Pros:

  • Interest saver. An offset account brings down the interest you pay. You can then divert this extra money into the home loan to pay it off quicker, reducing the life of your loan.
  • Cash is reusable. You can redraw on the amount in the offset account without incurring a fee.

Cons:

  • Loan amount stagnant. Your principal stays the same, so you aren't actually paying off the meat of the mortgage.
  • Fees. You may be charged a higher fee for having the offset facility included in your home loan package.

Extra repayment facility

Pros:

  • Interest saver. Extra repayments bring down the interest you pay and reduce the life of your loan.
  • Available on fixed loans. Often available with fixed rate loans, though there may be annual caps.
  • Pays off loan. Extra repayments can make a serious dent in the principal of the loan.

Cons:

  • Fees for redraw. May be charged a fee for dipping into extra repayments you’ve made.
  • Paid is paid. Unless you have a flexible and fee-free redraw facility, any extra repayments you make are permanent, so you can't call on them in case of emergencies. You may also have a redraw cap. 

What other home loan features should I consider?

Offset accounts and extra repayment facilities are both great options for saving costs on a home loan, while allowing you to draw on that amount later on if needed. But there are plenty of other features out there that provide great flexibility. 

For an overview of repayment holidays, home loan top ups and more, read our in depth guide on home loan features.

Does it cost extra to have an offset account?

That depends on the bank or lender. Some home loans that come with an offset account facility charge a monthly service fee. Others include them at no extra charge. 

You could also be charged a steeper interest rate to have an offset account, especially if you’re signing up with a full feature home loan that comes with a range of other features like fee free extra repayments, a redraw facility, and home loan portability.

What are the other benefits of an offset account?

An offset account is tax free, as the savings you make through reducing the amount of interest you pay on your loan are not classified as income. Always consult a tax professional, though!

Partial vs 100% offset

Keep in mind when you’re comparing home loans that there is a difference between a partial offset account and a 100% offset account.

Partial offset

There are two different types of partial offset accounts available:

  • Portion of your balance. Your provider may offset a percentage of the balance in your offset account to reduce the principal of your loan and the interest you pay. For example, if Lisa signs up with a loan with a 40% partial offset facility, $20,000 of her $50,000 balance will go towards bringing down the principal. So on a $500,000 home loan, she would only pay interest on $480,000.
  • Discounted rate. Another type of partial offset you may be offered is a discounted interest rate on the balance in your offset account. For instance, a home loan with a 5% interest rate that offers a 1.5% discount will mean you will only be charged 3.5% on the balance in the offset account.

100% offset

As the name suggests, 100% of the balance in your account will be offset against your home loan. So in the above scenario, the full $50,000 will be offset against Lisa’s $500,000 home loan amount and she will only pay interest on $450,000.

Tips for making an offset account work for you

  • Replace your bank account with your offset account. There’s no point signing up with a home loan that charges a higher interest rate and monthly fee if you’re not going to use the offset account feature. So consider replacing your everyday bank or savings accounts with your new offset account.
  • Get your salary deposited into the account. The best way to reduce the interest on your home loan is to have as much money in the offset account as possible, as your balance will be offset daily. So your first call of action when you set up your offset account should be to contact your employer/s to give them the account details.

Offset Home Loan Comparison Table - last updated 15 April 2024

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure
  • Offset Home Loan

    Package, Owner Occupier, LVR<60%, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    6.15% p.a. variable
    6.40% p.a.

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

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    Details
  • Mozo Expert Choice Badge
    Express Home Loan

    Owner Occupier, Principal & Interest, LVR <90%

    interest rate
    comparison rate
    Initial monthly repayment
    6.01% p.a. variable
    6.14% p.a.

    Get fast online approval from the award-winning Bendigo Bank Express Home Loan. Multiple offset accounts and redraw available. 100% offset on variable rate loans and partial offset on fixed rate. Flexible repayment options. New home loans only.

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  • Fixed Rate

    Owner Occupier, Principal & Interest, <80% LVR

    interest rate
    comparison rate
    Initial monthly repayment
    6.54% p.a.
    fixed 2 years
    7.06% p.a.

    Enjoy up to $3000 cashback for eligible first home buyers and $2000 cashback for refinancers on eligible home loans with the ANZ Fixed Rate Home Loan. Get the security of repayment certainty with a competitive locked in rate. No ongoing fees to pay. Offset account on 1-year fixed loans ($10/month fee applies). Interest-only payments allowed.

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    Details
  • Variable Investor Home Loan 80

    Investor, Principal and Interest, LVR<80%

    interest rate
    comparison rate
    Initial monthly repayment
    6.34% p.a. variable
    6.36% p.a.

    Affordable home loan rate for buyers or refinancers.. No monthly or ongoing fees. Option to add an offset for 0.10%. Access to savings with unlimited redraws available. Minimum 30% deposit required.

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    Details
Niko Iliakis
Niko Iliakis
Money writer

Niko has three years experience as a finance journalist. He specialises in home loans, business loans and interest rate movements at Mozo.

Evlin DuBose
Evlin DuBose
RG146
Senior Money Writer

Evlin, RG146 Generic Knowledge certified and a UTS Communications graduate, is a leading voice in finance news. As Mozo's go-to writer for RBA and interest rates, her work regularly features in Google's Top Stories and major publications like News.com.au.

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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