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Offset accounts in a nutshell
- An offset account is a linked transaction account that lowers the amount of your home loan balance that interest is calculated on.
- According to the latest APRA data, Australians have over $270 billion stashed in offset accounts.
- You can use your offset account like a regular transaction account to pay your bills while still saving on interest.
What is an offset account and how does it work?
An offset account is a feature that’s directly linked to your home loan, allowing you to use your savings to lower the interest you pay. It’s a popular feature because it can save you money on interest and help you pay off your loan faster.
An offset account works like a regular transaction or savings account, but with the added benefit of reducing the amount of interest you pay on your home loan.
For example, if you have $60,000 in your offset account and a $600,000 mortgage, you only pay interest on $540,000 of the loan.
Tip: Interest on home loans is calculated daily and charged monthly. By keeping a higher balance in your offset account, you lower the amount of your loan that interest is calculated on, which helps you save more over time. Speak with a mortgage broker or financial advisor on ways to get the most out of an offset account based on your financial position and goals.
Does an offset account reduce my monthly repayments?
An offset account doesn’t directly reduce your monthly repayments, but it does lower the amount of interest you pay on your home loan. Instead, the savings on interest can help you pay off the loan faster or you can put the money aside for other necessities.
Offset account example: How to save on interest
- If you borrow $800,000 for a $1 million property with a 6.34% p.a. interest rate over 30 years, your minimum monthly repayment will be $4,973.
- With an initial offset account balance of $40,000, you’ll save $195,378 in interest and shorten your loan term by 3 years and 3 months.
- Instead of paying $990,158 in interest over 30 years without an offset account, you’ll pay $794,780 over 26 years and 9 months.
Tip: When you take out a mortgage, aim to save 5-10% of the loan amount in your offset account. The more money you have in there, the more you’ll save on interest and the faster you’ll pay off your loan.
Does a home loan offset account have any fees?
The cost of an offset account can vary. Some lenders offer offset accounts with no additional fees, while others might charge a monthly or annual fee. These fees typically range from $10 to $20 per month, but some may charge a one-off fee or an annual fee as high as $400 per year.
That’s why it’s important to fully understand whether an offset account is right for you. You don’t want to be paying for a home loan feature you’re not going to use.
Here’s an example of a lender charging a fee to use an offset account:
Offset account pros and cons
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Reduces the amount of interest you pay, helping you save money over the life of your loan.
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You can use the offset account for everyday transactions, while still benefiting from interest savings.
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By lowering the interest charged, you can pay off your loan faster by making extra repayments towards the principal.
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May come with fees or a higher interest rate on your home loan, which could negate any interest savings.
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You need a decent amount in the offset account to really see results, which requires financial discipline.
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Usually not available on fixed rate home loans, meaning your mortgage options will likely be limited to variable-rate loans.
How to get the most out of your offset account
Here are three ways to take full advantage of an offset account:
1
Maximise your balance
To get the most out of your offset account, try to keep a healthy balance in it. If you’re in a position to do so, aim to save a sizeable portion of your home loan balance. While every dollar counts, a higher amount in your offset account will work much harder, leading to greater savings overall.
This means depositing your income, savings and any lump sum payments, such as tax returns, into it. You can also transfer money made from any other activities, like side hustles or selling unwanted items around the house.
2
Make it your main account
Most offset accounts work like regular transaction accounts, meaning you can deposit cash and make bill payments. Get into a habit of using it as your primary account to ensure there’s always money coming in.
Make sure your income is deposited into your offset account and automate regular payments from it. This ensures that your offset balance remains high without requiring manual transfers.
3
Save for future investments
Even though the balance of your offset account will fluctuate, you can still use it to save up for future investments, like a down payment on an investment property or buying shares.
Think of it like this: an offset account helps you save money in two ways. It’s not only putting cash aside but also cutting down the interest you pay.
Is it worth having an offset account?
Getting a loan with an offset account can be a great way to save on interest while keeping your money within reach. If you want to cut down your home loan costs without tying up your funds, an offset account could be a good choice.
Keep in mind that many lenders will offer an offset account in exchange for a fee - either as part of a packaged home loan, or as an ongoing, one-off or annual fee. Additionally, some lenders might waive any fees but charge you a higher interest rate.
Talk to a mortgage broker about how an offset account could benefit your situation. Brokers are experts in home loans and can guide you on saving interest and paying off your mortgage faster. If your financial situation is particularly complicated, you could get advice from a financial planner.
FAQs about home loan offset accounts
What does ‘partial’ and ‘fully’ offset mean?
When it comes to offset accounts, you might encounter terms like ‘partial offset’ and ‘fully offset.’ Here’s what they mean:
Fully offset account: 100% of the balance in your offset account is subtracted from your home loan balance when calculating interest, reducing the interest charged on the entire loan amount. For example, if you have a $300,000 loan and $50,000 in a fully offset account, you only pay interest on $250,000.
Partial offset account: Only a portion of the balance in your offset account is used to reduce the interest on your mortgage. This means you still pay interest on part of the loan balance. For example, if you have a $300,000 loan and $50,000 in a partially offset account with a 50% rate, you’ll pay interest on $275,000.
How do I set up and link my offset account to my home loan?
Depending on your bank, you can usually set up and link your offset account through the online portal or via your lender’s app. Better yet, you can contact your lender to confirm the offset account is linked to your home loan.
What are the disadvantages of an offset account?
While an offset account can help reduce your home loan interest, it does have some downsides. Many offset accounts come with higher fees or a higher interest rate compared to basic home loans.
Additionally, if you don’t keep a significant balance in the offset account, the savings on interest might not be worth the extra costs (if any are applicable). Plus, some lenders might have complex terms or restrictions on how it can be used, making it important to fully understand these details before committing.
Can you have more than one offset account?
Yes, most lenders allow you to have more than one offset account, with some banks even letting you open up to 99 accounts. Each of these accounts can be linked to your home loan and will reduce your interest based on the balance in each account.
Many borrowers use multiple offset accounts to manage their finances more effectively, such as having one for utilities and another for mortgage repayments. However, keep in mind that having several offset accounts might come with extra fees or conditions, so it’s important to check with your lender or broker about any potential costs or restrictions.
Offset account vs redraw facility: What’s the difference?
An offset account is a separate transaction account linked to your home loan that reduces the interest you pay by offsetting the loan balance, with funds easily accessible. A redraw facility allows you to make extra repayments on your loan and withdraw those funds later, but access may be less flexible and subject to restrictions.
What happens if I have more money in my offset account than mortgage?
If the balance in your offset account is more than your home loan, it usually won’t lower the interest beyond the loan amount. It will still cut down your interest costs, but keep in mind that lenders might calculate interest differently or have different terms.
In this case, it might be a good idea to speak to a mortgage broker or financial advisor to figure out the best strategy for your needs and goals.