What is an offset account, and how much could it save you?

You can’t overlook a home loan with an offset account if you want to save money. Not only can offsets shrink your monthly repayments, but they can slash the amount of interest you pay over the long term if you play your cards right.

An offset account is a type of bank account that is linked to your home loan and used to reduce the amount of interest you pay. 

You’re able to have your salary deposited into it, it comes with a debit card, and you can even use it to pay for things like groceries and bills. 

An offset accountworks by ‘offsetting’ the part of your home loan balance that is used to calculate your mortgage repayments.

The easiest way to understand how an offset account works is to use an example.

For instance, if you have a $500,000 home loan and $50,000 in an offset account, you will only be charged interest on $450,000.

But how much could offsetting your home loan save you?

Let’s say you have a $500,000 home loan with a 6% interest rate for 25 years. Without an offset account, the total amount of interest you will pay is $466,452. 

However, if you managed to maintain a $50,000 balance in your offset throughout the entirety of your 25-year loan, you would save $142,161 and even cut down the time it takes to pay off your loan by 3 years and 8 months, according to Westpac’s offset account calculator .

Of course, it’s not always possible for everyone to maintain a consistent offset account balance, so your situation will be unique to you. It’s also important to understand that not all offset accounts are ‘100% offset’ – some lenders may use a ‘partial offset’ calculation, which you can read about below.

Different banks and home loan lenders have different offset account features, but these are some of the more common ones out there: 

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 your $500,000 home loan amount and you will only pay interest on $450,000.

Partial offset 

A partial offset can be calculated in two ways: 

• 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 you sign up for a loan with a 40% partial offset facility, $20,000 of your $50,000 balance will go towards bringing down the principal. So on a $500,000 home loan, you 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.

Multiple offset accounts

Some lenders offer multiple offset accounts that can help you streamline your finances and budget better. 

Think of multiple offsets like having different ‘buckets’. You can split up your offsets and use one for savings, another for your daily expenses, and another for paying bills, all the while reducing the amount of interest you are charged. 

Debit cards 

Most offset accounts come with a debit card which can be used to pay for things whenever you need to.

1. Reduces interest. The main benefit of a mortgage offset is reducing how much interest you pay by ‘offsetting’ your home loan balance with the amount of money held in your offset account. 
2. Helps you budget. A home loan with multiple offset accounts can help you budget while reducing your interest bill. For example, having one offset account for daily expenses, another for bills, and one for savings allows you to keep your finances organised and take advantage of the power of a mortgage offset at the same time. 
3. Flexible access to your cash. Unlike a redraw facility, you can use the money in your offset account at any time without restrictions on the amount of transactions or paying a fee. Read about which one is better for you.
4. Tax benefits. The money you keep in your offset account doesn’t generate any interest, so it’s tax-free. You also won’t be taxed on the home loan interest you save. 

One of the disadvantages of offset accounts is that they typically come with slightly higher interest rates. For example, the average ‘basic’ variable rate home loan in the Mozo database is 6.29% p.a., while the average variable rate with an offset account comes in at 6.59% p.a.†.

It’s also important to note that some lenders charge a fee or extra interest to add an offset account to your home loan. For instance, you might have to pay $10 per month or an extra 0.10% on top of your rate. 

This means you need to weigh up whether an offset account is the right choice for you. Can you put enough in your offset to make it worthwhile?

There’s no point signing up for a home loan with a slightly higher interest rate or a monthly fee if you don’t make the most of your offset account’s interest-saving ability. 

To take full advantage of your offset, you can replace your bank account with an offset account and make sure you deposit your salary into it each time you get paid.

You essentially want to have as much of your money in your offset account as possible at all times, given your mortgage balance is offset daily. 

To help facilitate the transition from your everyday bank account to an offset, you can request that your employer pay your income directly into your offset account, saving you the hassle of remembering to transfer your pay across each cycle.

Due to offset home loans having slightly higher interest rates on average, you’ll need to consider whether your income, or offset account balance, will be enough to make a meaningful dent in your repayments. Otherwise, you might be better off choosing a home loan without an offset account to begin with. 

This is why it’s important to compare home loans holistically, not just by the interest rate. Make sure you read up about other home loan features that might better suit your needs, and use a mortgage repayment calculator to get a rough idea of how much a home loan might cost you. 

†Average variable rates based on a 25-year, owner-occupied home loan at $400,000, with principal & interest repayments and <80% LVR.