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Offset accounts explained

An offset account can be a good way to reduce the interest charged on your home loan, while also giving you access to your money whenever you need it. Here’s an explanation of how they work.

What is an offset account?

An offset account is a transaction account linked to your home loan. You can make deposits or withdraw from it as you would with a regular transaction account.

The big difference is that when you hold money in an offset account over a period of time, you can reduce the amount of interest charged on your home loan. The higher the balance and the longer the period, the less interest you’ll pay.  And this could help you pay off your loan sooner.

Generally speaking, the offset feature is only available on variable rate home loans (although some lenders offer an offset feature on selected fixed rate home loans).

How does it work?

Sometimes the best way of explaining things is to use an example.

  • Let’s say you take out a $400,000 home loan.
  • You then deposit $10,000 into your offset account.
  • You’ll now be charged interest on $390,000, instead of the full $400,000.
  • This will happen for as long as the $10,000 stays in your offset account.

How much could I save?

Keeping money in your account can potentially save you thousands of dollars and cut years off your home loan period.

Let’s look at the above example to see how much you could save.

  • You take out a home loan for $400,000.
  • The interest rate is 5%.
  • The initial loan period is 30 years.
  • You keep $10,000 in your offset account for the life of the loan.
  • You save over $30,000 in interest.
  • You reduce the time it takes to pay off your loan by more than a year.

How to use an offset account

Some people may have their pay deposited straight into their offset account and treat it as an everyday transaction account. Others may use their offset as a savings account for things like holidays or renovations – or for less exciting purposes like setting aside money for their tax bill.

Offset account v normal savings account

Your money generally works harder in an offset account compared to a regular savings account.  That’s because the interest rate you pay on a home loan is usually higher than the interest you earn in a savings account.

Another advantage is the interest you save by using an offset account won’t be considered income – which means it won’t be taxed. On the other hand, the interest you earn on a savings account will generally be considered income – and that means it may be taxed.

Is an offset account right for you?

Everyone’s situation is different. Before deciding on a mortgage with an offset account, you may wish to consider a few factors.  If you want regular access to your money, then an offset might work for you.

But remember that most lenders will charge for an offset account. You may pay a monthly fee. Or if your offset account is offered as part of a package, there’ll be an annual package fee.

It may be worth considering whether the amount of interest you’re likely to save will be more than the fee. Your lender or financial adviser can help you do the numbers in order to understand whether an offset account is right for you.

What’s the difference between offset and redraw?

Redraw facilities work in a similar way to offset accounts, but there are key differences. Generally speaking, redraw facilities are less flexible, but they can have advantages too.

We’ve put together an article explaining how redraw facilities work. Or if you’ve already read that, we suggest reading our article that looks more closely at the differences between offset accounts and redraw facilities.

To sum up

  • An offset account is a transaction account linked to your home loan.
  • It could help reduce the amount of interest you pay on your loan and help you pay it off sooner.
  • The more money in your offset account, the less interest you’ll pay.

Calculators to help you plan

Home Loan Deposit Calculator

Estimate how much you’ll have for a deposit once upfront costs are deducted.

Repayments Calculator

Estimate what your home loan repayments could be.

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