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Dreaming of paying off your home loan sooner? An offset account is one of the most effective ways to chip away at your mortgage. Unlike a regular savings account, an offset doesn’t earn you interest. Instead, it saves you interest on your home loan.
Let’s explore how this feature can save you tons of cash and shave years off your loan.
Key Takeaways
- An offset account is a transaction account linked to your home loan.
- The balance in the account reduces your principal loan balance before interest is calculated, saving you mortgage interest instead of earning taxable savings interest.
- Money in the account is fully accessible, unlike funds held in a redraw facility.
- Offsets are best suited for those with a good savings habit and spare cash flow.
What Is an Offset Account?
Definition
An offset account is basically a daily transaction account that is directly linked to your eligible home loan. The balance of the money held in this account is ‘offset’ against the outstanding loan principal. You can deposit your salary, pay bills, and use a linked debit card, just like any other everyday bank account.
What is a mortgage offset account?
This is the most common context for an offset account. It’s a bank account specifically provided by your lender that works in tandem with your home loan to reduce the amount of interest you are charged.
Offset vs. regular savings account
Unlike traditional savings accounts, an offset account can help you save interest on a mortgage, as opposed to generating interest on your savings. This tax-free saving is often more beneficial than the after-tax interest you’d earn elsewhere.
How Does an Offset Account Work?
Step-by-step process
The beauty of an offset account is that it works behind the scenes, here’s how:
- Daily balance check: The lender checks the closing balance of your home loan and your linked offset account each day.
- The ‘offset’: The balance in your offset account is subtracted from your outstanding loan balance.
- Interest calculation: Interest is only charged on the difference between the loan balance and the funds held in your offset account.
- Repayment: Your regular monthly repayment amount remains the same, but because less interest is being charged, more of your payment goes toward paying down the principal.
How daily interest is calculated
Let’s say you have a loan of $500,000 at an interest rate of 6% p.a., and you have $50,000 sitting in your offset account. The interest is calculated on the net balance of $450,000 (after deducting $50,000). The daily interest charged would be:
Daily Interest = (Net Balance x Interest Rate) / 365
Daily Interest = ($450,000 x 0.06) / 365 = ~$73.97
Without the offset account, the daily interest on the full $500,000 would be approximately $82.19, saving you $8.22 each day.
Full vs. partial offset explained
A full offset (100%) is the standard, and most common, type. Every dollar in the offset account reduces the loan principal by one dollar. A partial offset, in comparison, is much less common. This feature might only offset a percentage of the funds. For instance, a 50% offset account with $50,000 means only $25,000 is offset against the loan. This might be offered on basic or fixed-rate loans at a lower fee, but the savings are significantly less.
Benefits of an Offset Account
Leveraging an offset account can give you numerous financial advantages, namely:
Massive interest reduction
All the money in your offset account directly cuts down the outstanding balance your loan interest is charged on. This simple mechanism is highly powerful and leads to major, tax-free interest savings over the life of your mortgage.
Flexible fund access
Money held in your offset account is like having cash on hand, meaning it’s easily accessible (liquid). You can withdraw it for an emergency or to pay a big bill without needing to reapply for access to the funds or pay withdrawal fees. This offers flexibility and peace of mind.
Long-term savings & loan payoff acceleration
With less money going to interest costs, more money is put towards paying down the capital — this allows you to become mortgage-free sooner and save total costs on your loan. Reducing your debt today also boosts your borrowing power tomorrow, which is crucial when it comes to buying an investment property.
Say you have a $400,000 loan with a 25-year term and a 6% p.a. interest rate. By consistently keeping an average balance of $50,000 in a full offset account, you could not only save over $80,000 in interest over the life of the loan, but also pay off your loan approximately 4 years faster.
Does an Offset Account Reduce Monthly Repayments?
Generally, the required minimum monthly repayment amount does not automatically reduce when you have funds in an offset account. Lenders typically calculate your required repayment based on the full initial loan amount and the term. The benefit is that with the interest savings, more of your existing repayment goes towards paying down the principal, accelerating the loan payoff.
However, once you have made a significant dent in your principal, you can often contact your lender and ask for your monthly repayments to be recalculated based on the lower current principal balance and the remaining loan term.
Do Offset Accounts Earn Interest?
How offset works vs. earning interest
An offset account does not earn interest for you. This is a common misconception. Instead, the account’s balance works to save you the interest you would otherwise be charged on your home loan. The interest savings are the benefit, not interest earnings.
Offset account vs. savings account comparison
When comparing the two, you need to consider the following:
- Offset savings: The savings are calculated at your home loan interest rate (e.g., 6% p.a.) and are tax-free.
- Savings account earnings: The earnings are calculated at the account’s interest rate (e.g., 4.5% p.a.) and are taxable at your marginal income tax rate (e.g., 32% including Medicare Levy).
In most cases, the after-tax interest savings from the offset account will be greater than the after-tax interest earned from a high-interest savings account.
Offset Account Examples
These scenarios illustrate the power of having funds sitting in your offset account, even with small amounts. Let’s assume a $400,000 loan at 6% p.a. for the examples below.
Scenario 1 — Low balance offset
Even a small, consistent balance of $5,000 means the bank calculates interest on $395,000 instead of the full $400,000. Your everyday transaction account is actively working to save you interest every single day, making it a powerful start for your savings journey.
Scenario 2 — Medium balance
With $30,000 in your offset, the interest is calculated on $370,000. This is typically enough to save you hundreds of dollars in interest each month and ensures your emergency fund is highly liquid while drastically reducing your debt costs.
Scenario 3 — High savings with offset
A substantial balance of $100,000 reduces the interest-bearing principal to just $300,000. This level of savings results in massive, tax-free interest reduction, potentially shaving years off your loan term and saving tens of thousands of dollars in total interest paid.
[offset savings calculator]
Offset vs. Other Mortgage Features
Offset vs. redraw facility
Both offset accounts and redraw facilities reduce your interest payable by lowering the principal balance used for calculations. The key difference is accessibility and structure.
An offset account is a separate, liquid transaction account where funds are easily available via debit card, and it offers better tax safety for investors. A redraw facility involves locking extra money directly into the loan principal; while it saves interest, accessing the funds requires a formal redraw process.
Offset vs. loan prepayment
Prepaying your loan (making extra payments directly into the principal) works in the same way as an offset to reduce the principal balance for interest calculation. The key difference is the accessibility of the funds. Once you prepay, the funds are locked into the loan (unless you use the redraw facility). Offset funds remain liquid and accessible.
Offset vs. high-interest savings account
As discussed, for most Australians, the tax-free interest savings from the offset account will outweigh the after-tax interest earnings of a high-interest savings account. However, if you have a low-fee home loan that doesn’t offer an offset, or if you only have a small amount of savings, a high-interest account might be a decent alternative.
The table below highlights how each feature stacks up against each other.
| Feature | Offset account | Redraw facility | High-interest savings account |
| Interest reduction | Yes | Yes | No |
| Funds accessibility | Excellent (liquid) | Good (requires redraw) | Excellent (liquid) |
| Taxation | Interest savings are tax-free | n/a | Interest earnings are taxable |
| Annual fee | Often incurs a package/annual fee | Usually free | Usually free |
Who Should Consider an Offset Account?
Ideal borrower profiles
An offset account is best suited for:
- Good savers: Individuals who can consistently maintain a decent cash balance.
- Property investors: Those seeking tax efficiency on a property by using the offset to reduce interest costs without touching the tax-deductible loan principal.
- The risk-averse: People who want to reduce debt but also need the security of an easily accessible emergency fund.
Is an offset right for you?
To help you make the final decision, use this checklist to assess your suitability. If your answers lean heavily towards “Yes,” an offset account is likely a good fit.
| Question | Yes | No |
| Do I have a reliable savings habit and/or a decent emergency fund? | ||
| Is the interest I save greater than the annual package fee for the offset account? | ||
| Do I need constant, easy access to my funds for emergencies or large bills? | ||
| Am I seeking a tax-free way to reduce my interest costs? |
Limitations & Things to Know
Ensure you’re aware of these risks of using an offset account before taking the plunge.
Annual fees and rates
Loans with an offset account often come with an annual package fee (or a slightly higher interest rate) compared to a basic loan. You need to ensure the interest you save outweighs this fee.
Minimum balance requirements
Some lenders might require a minimum ongoing balance to maintain the offset feature, but this is becoming less common.
Limitations on fixed-rate loans
Full offset accounts are typically only available on variable-rate home loans. Some lenders may offer a partial offset (e.g., 50%) on a fixed-rate loan, but you’ll need to check the fine print.
Ready to put your spare cash to work and tackle your mortgage sooner? With an experienced residential buyer’s agency like InvestorKit, you get research-backed guidance to get you on the right path to financing your dream property.
Speak with our property experts at InvestorKit today to get started!
FAQs
What is an offset account?
A transaction account linked to your mortgage where the balance reduces the principal your interest is calculated on.
What is a mortgage offset account?
An offset account offered by a lender specifically to reduce the interest charged on a home loan.
How does an offset account work?
The offset account balance is subtracted from your home loan balance daily. Interest is then only charged on the resulting net amount.
Does an offset account reduce monthly repayments?
It doesn’t automatically reduce the minimum required repayment, but the interest savings mean more of your existing payment goes to the principal, accelerating the payoff. You can ask your lender to recalculate repayments later.
Do offset accounts earn interest?
No, they do not. They save you the interest you would otherwise be charged on your home loan.
How much should I keep in an offset?
Ideally, as much as possible! Consider keeping your emergency fund (3-6 months’ expenses) and your everyday cash flow in the account.
Can I withdraw from an offset account?
Yes, absolutely. The funds are fully liquid and accessible via ATM, debit card, or online transfer, just like a standard bank account.
Offset vs. redraw — which is better?
Offset is generally considered better for the flexibility of accessing funds (liquidity) and for the tax safety it provides for property investors.