An offset account is a transactional bank account that is linked to a home loan account. Money that is held in an offset account reduces the interest payable on the home loan. Since interest payable on a home loan is calculated daily, holding money in an offset account for even a short period of time can be beneficial. For many people, it makes sense to have income credited into an offset account and then gradually withdrawn over coming days and weeks.
Let’s look at an example to illustrate how an offset account works.
Home loan balance : $300,000
Average daily balance in offset account : $5,000
In this example, daily interest is calculated on a loan of $300,000 minus $5,000 = $295,000. If the interest rate on the home loan is 4.00%, the offset account would reduce the annual interest bill by $200.
Who is an Offset Account Good For?
Anyone with a home loan can benefit from using an offset account. Even someone who lives from paycheque to paycheque can reduce their mortgage interest bill by depositing their wage into an offset account.
How Much Does an Offset Account Cost?
Most banks include an offset account into their home loan packages. These packages will often carry a name – such as Breakfree (ANZ) or Orange Advantage (ING) and most will have an annual fee. Many lenders offer lower interest rates on their home loan packages.