Key takeaways:
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 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.
Here’s an example:
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.
Offset account pros and cons
Pros | Cons |
Reduces the amount of interest you pay, helping you save money over the life of your loan. | May come with fees or a higher interest rate on your home loan, which could negate any interest savings. |
You can use the offset account for everyday transactions, while still benefiting from interest savings. | You need a decent amount in the offset account to really see results, which requires financial discipline. |
By lowering the interest charged, you can pay off your loan faster by making extra repayments towards the principal. | Usually not available on fixed rate home loans, meaning your mortgage options will likely be limited to variable-rate deals. |
How to get the most out of your offset account
Here are three ways to take full advantage of an offset account:
1. Maximise the 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 sizable 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.