What is an Offset Account? How It Works and Why It Matters

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What is an Offset Account?

An offset account is a savings or transaction account that is linked to an eligible home or investment loan. It functions just like any other savings or transaction account, providing a bank card for electronic transactions, transfers, and ATM withdrawals.

Offset accounts are typically only available for variable home loans. A few lenders offer them for fixed-rate loans, but there are usually restrictions. If you prefer the certainty of a fixed interest rate but want the benefits of an offset account, you might consider splitting your loan into a fixed portion and a variable portion. Be sure to check with us first!

How Does an Offset Account Work?

The balance in your offset account is subtracted, or ‘offset,’ from your home loan balance, reducing the amount of interest you are charged. For example, if you have a $300,000 loan and $20,000 in your offset account, you will only pay interest on $280,000. The most common type of offset account is a 100% offset account.

Offset Account vs. Savings Account: Which is Better?

Interest earned on a savings account is generally lower than the interest rate charged on a home loan, and you’ll also need to pay tax on any interest earned. In contrast, an offset account can save you thousands over the life of your loan by reducing the interest you pay.

However, an offset account is just one feature that may come with your home loan. There isn’t a ‘one-size-fits-all’ solution – the right features for your loan depend on your personal financial situation.

How to Make the Most of Your Offset Account

  • Maximise Your Savings in the Offset Account: Deposit as much of your savings into your offset account as possible. The simplest way to do this is by using it as your everyday banking account. Arrange for your salary to be paid directly into it to maximize the funds offsetting your loan interest.
  • Leverage Your Credit Card’s Interest-Free Period: Pay for your monthly expenses using your credit card within the interest-free period and pay off the full balance before the due date. This allows you to keep more money in your offset account for longer, reducing your mortgage interest charges. However, remember that if you don’t pay off the credit card within the interest-free period, the interest charges on the card will far outweigh any savings from your offset account.
  • Practice Financial Discipline: An offset account is a great way to build up savings while reducing your loan interest, but it requires discipline.
  • Establish a budget and track your spending to ensure your savings grow over time. To prevent the temptation of dipping into your savings, consider:
    • Using the offset account strictly for savings.
    • Avoid linking the offset account to your debit card to limit access.
    • Setting up two offset accounts: one for daily expenses and the other strictly for savings. Transfer savings into the designated account as soon as you get paid to encourage disciplined spending.

If you’d like to discuss how an offset account could work for you, please don’t hesitate to call our office for a chat!