What is a Mortgage Offset Account?

Offset account explained by our home loan expert

An offset account could shave years off your home loan and reduce the amount of interest paid on your mortgage. Our home loan expert explains.

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An offset account is usually a transactional account linked to your home loan. The balance held in this account "offsets" the balance in the mortgage, helping to reduce the interest paid and overall term of the loan.

Many lenders offer a 100% offset account as a feature with standard variable home loans. Regular repayments are made to the loan as required, and a separate transaction account is set up with the same financial institution.

You can deposit your income into this transaction account and use it for day-to-day expenses. Any money in this account is offset against the amount owing on the home loan, and interest payable on the mortgage is then calculated on the loan balance less funds held in the offset account, reducing the amount of interest paid on your loan.

How does an offset account work?

Here's an example: say you have $10,000 in your offset account and you currently owe $500,000 on your home loan. The money in your offset account ensures you only pay interest on your mortgage minus the money in your offset account. In other words, you will be charged interest on a $490,000 loan, rather than a $500,000 loan.

Offset account

If you have a decent amount of money in your offset account from day one, you could find that it saves you thousands of dollars in interest over the life of your loan. But, keep in mind there may be higher monthly fees attached to the account and a minimum balance may be required in the account.

Key benefits of an offset account

Flexible and accessible

A typical offset account is essentially an everyday transactional account, so it's very easy to deposit and withdraw your funds, especially when compared to a line of credit or redraw facility.

High interest 'return' on your savings

Interest rates charged on home loans are usually higher than interest rates paid on everyday transactional accounts. So while you don't receive interest on your savings in the offset account, the interest that you save on your home loan will typically outweigh potential interest gains.

Interest calculated daily

Interest is calculated daily, so whether you save regularly or live pay-to-pay, as soon as there are some savings in your offset account for more than one day at any point in time, you will benefit from the offset impact on your home loan.

Reducing your tax bill

Savings interest is taxable, but because your offset account balance is used to reduce your loan interest, no tax is payable, so you are effectively reducing your tax bill.

Things to consider with offset accounts

Higher fees

You may have higher monthly or annual fees attached to the account, so it's important to check in with your broker to make sure that you will be financially better off using this option - that is, that potential savings will be greater than the cost of any fees.

Minimum balance

You may need a minimum balance in the account to realise the potential benefits.

In basic terms, if you do not think you can have a regular sum of money saved in your offset account, then you might not be financially better off with this home loan feature.

What is an offset account?