Offset Account: What It Is And How It Works

An offset account is a linked bank account that reduces your home loan interest.

When you deposit your funds into an offset account, you lower your interest owed and save money. In this article, we will dive deep into offset accounts and learn what they are, the different types of offset accounts, and how you can use them to reduce your interest payments.

What Is An Offset Account?

An offset account is a bank account linked to your home loan that helps reduce the interest you pay. Any money deposited into the offset account basically offsets (reduces) the balance of your loan for interest calculations. This means the bank charges interest on your loan amount minus the offset account balance, helping you save on interest. Essentially, an offset account reduces the effective size of the principal of your loan amount when the bank calculates your interest, lowering your interest payments.

The money in your offset account creates a buffer that makes the interest calculation lower, while still allowing you to use your money whenever you need it. Offset accounts help you pay off your loan faster without trapping your money. They give you flexibility to manage your money while reducing your mortgage.

Instead of earning little interest in a savings account, with an offset, you directly reduce your loan interest, saving a lot of money and shortening your loan term. This account can also help you handle unexpected costs. Using an offset account makes your home loan cheaper and more efficient.

How Does An Offset Account Work?

An offset account is a linked transaction account that usually has a deposit and withdrawal facility.

You can simply deposit your salary into your offset account and can use this money for your daily expenses, just like a normal cheque account. And based on the amount of money you have in your offset account on the date your lender calculates your interest, your home loan interest charge will be less.

Naturally, the more money you have in your offset account, the more interest you will save. Here are some of the requirements you need for an offset account:

• Home loan with a lender that offers offset accounts for your loan product
• Transaction account linked to your home loan
• Must meet the lender’s general loan requirements
• Regular usage of the offset account to maximise benefits

Not all lenders facilitate offset accounts and, for the ones who do, not every home loan features an offset account. So, finding a home loan with an offset account is crucial. As expert mortgage brokers, Home Loan Experts specialises in identifying the best-fit loan for your needs, including those with powerful offset account features.

We’ll work with you to understand your goals and find a solution that maximises your savings. You can complete our free online assessment form to talk to one of our mortgage brokers, who will help you find the perfect lender that offers offset accounts.

Types Of Offset Accounts

There are mainly two types of offset accounts:

Partial Offset Account

A partial offset account allows you to offset a percentage of your loan balance, rather than the full amount. This means that only a portion of your savings is used to reduce the interest calculation.

For example, if you have a 50% partial offset account with $10,000, only $5000 will be used to offset your loan balance. The remaining $5000 will not contribute to reducing your interest

Customers may not qualify for a full offset feature due to the type of loan they have.
Here are the loan types not eligible for a full offset:

1. Fixed-Rate Home Loans

2. Some Low-Doc Loans

3. Construction Loans

4. Basic Home Loans

5. Some Interest-Only Loans

100% Offset Account

A 100% offset account allows you to offset your entire loan balance with the funds in your linked transaction account. If you have $20,000 in your 100% offset account and a $200,000 loan, the bank will calculate interest only on $180,000.

This is the most common type of offset account, as it saves you more interest. Every dollar in your offset account directly reduces the amount on which interest is charged, allowing you to shorten your loan term and save money.

A full offset account is typically available with the following types of home loans:

1. Variable-Rate home loans

2. Principal & Interest (P&I) Loans

3. Some Interest-Only Loans (Investment or Owner-Occupier)

4. Professional Package home loans

5. Some Fixed-Rate loans (with special conditions)

6. Owner-Occupier & Investment loans (depending on the lender)

How To Make The Most Of An Offset Account?

To maximise the benefits of an offset account, you need to manage your finances strategically. Here’s how you can do this:

Deposit Your Salary Into Your Offset Account

When you direct your paycheck into your offset account, it ensures your funds are working to reduce your loan interest as soon as possible. Even short periods with higher balances can contribute more to overall savings.

Pool All Your Extra Money Into Your Offset

You should deposit any surplus funds, such as bonuses, tax refunds or savings, into your offset account. The higher the balance, the greater the interest reduction.

Use A Credit Card And Pay Before Due Date

Use a credit card for daily expenses and pay the balance in full before the due date. This helps you keep your money in the offset account for a long period. You also maximise the time your funds are offsetting your loan interest. Note that this method requires strict discipline to avoid credit-card interest.

How Much Interest Could You Save With An Offset Account?

If you had a home loan of $600,000 and a 100% offset account with $20,000, the bank would charge you interest on only $580,000 on the date it calculates your interest for the period.

So how does this compare with putting your money in a savings account?

Well, If you were to put $20,000 in a savings account, you would earn $1000 per year at 5% interest. In addition to this, you would be taxed on this interest.

By leaving that $20,000 in your offset account, however, you would save over $1400 in interest each year.

Pros Of An Offset Account

You need to factor in the pros and cons of an offset account before deciding if it is for you.
Here are the pros:

Tax Savings

With an offset account, you can save a good amount on your taxes. Interest savings you make with an offset account isn’t taxed. However, if you put the same money into a savings account, the interest you accumulate will be taxed.

No Restrictions

You have easy access to funds in your offset account. So, in case of emergencies, you can always withdraw money from it.

Pool Income To Reduce Home Loan

If you have multiple income sources, you will be able to pool your bonuses, profits from investments, and other incomes in your offset account.

Who can benefit from a 100% offset account?

There are also certain disadvantages that come with an offset account:

Miscellaneous costs

Opening an offset account can require extra costs such as bank fees and other charges. Some banks may even charge a monthly account fee for an offset account. So, be prepared for this.

Higher Deposits

If you want to enjoy an offset account’s benefits, you need to make higher deposits into your account, as the more you have, the more interest you are likely to save.

Limited Availability

Offset accounts are usually linked to variable-rate home loans. Banks generally don’t offer offsets on fixed-rate home loans, but most offer a redraw facility.

Final Words

If you want to accelerate paying off your loan, an offset account is a no-brainer. It reduces your interest costs and offers flexibility. Offset accounts are especially great for those with regular income and disciplined financial habits.

An offset account works by reducing the overall cost of your mortgage and helps you achieve financial stability. But before you commit, ensure you consider your financial situation, compare lender offerings, and determine whether the savings outweigh associated fees or not.