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What is an offset account?
An offset account is a bank account linked to your home loan. The lender takes its balance off the loan amount when working out interest. You can still use the money for daily spending. It can cut interest costs, but does not pay off the debt itself. Extra fees may apply.
Updated
How does an offset account reduce interest?
The lender takes the linked account's balance off your loan balance before it works out interest. Most home loan interest is worked out each day. Cash in the account can therefore change that day's charge.
If each loan payment covers both debt and interest, a lower interest charge can leave more to pay off debt. Using your offset cash cuts that effect. The cash held beside the loan has not itself been paid into the loan.
Is an offset account the same as redraw?
No. Cash in an offset stays in its own bank account. Redraw lets you take back extra payments already made into the loan, if the lender allows it. Taking offset cash out does not raise the debt, or principal. A redraw does.
Most offsets come with a variable rate loan, where the rate can change. The account rules say how you can take cash out. They also say how much of that cash counts towards the offset. The name of the feature alone does not tell you these details.
What costs and account details matter?
The interest saved has to be weighed against account fees, package fees and the loan rate. With a small cash balance, you may save little. The offset loan may cost more than a loan that lacks this feature.
ASIC has found cases where the bank failed to link the account to the loan. People then paid too much interest. The link may need to be checked after a loan change or refinance, when you replace a loan. Bank records should show which account is linked to which debt.
Illustrative example4 steps
Keeping a $35,000 cash reserve beside the mortgage
- Outstanding mortgage: $460,000.
- Cash reserve in a linked full offset: $35,000.
- Interest calculation balance: $460,000 minus $35,000 = $425,000.
- The borrower can still access the reserve, while the mortgage principal remains $460,000.
For investors
Cash in an offset and extra repayments have different tax effects.
Tax rules for loan interest depend on how you use the borrowed money. A private redraw can leave part of a rental loan used for personal costs. This is so even if the rental home backs the loan. An offset keeps your savings apart from the debt. Lower interest costs also mean less interest to claim at tax time. Confirm the tax result with your accountant.
Common questions
Questions about offset account
Keep learning
Property is a complex world.
Offset account is one piece of it. Lending rules decide how much you can borrow, and how soon you can buy again. Next, read about redraw facility, principal and interest loan and interest-only loan.
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