Mortgage offset accounts

A mortgage offset account (also known as a home loan offset account or an offset account) is a type of transaction account linked to your home loan. You can ‘offset’ its balance against your home loan’s balance for the purpose of calculating your interest payable. You could potentially pay less interest on your mortgage over the loan term by utilising an offset account.

Offset accounts essentially function as an everyday transaction account, while providing a financial buffer against the interest on your outstanding loan. Provided you have money in your offset account, they can help you save money by reducing the amount of interest you pay on your home loan balance.

Offset accounts can be 100% offset (meaning the entirety of the account’s balance is used to calculate your reduced interest repayment) or a partial offset, which generally means a percentage of the account’s balance is used. Your lender will calculate daily interest using the difference between your mortgage offset account and the balance on the home loan.

Note: Interest on a home loan is typically calculated daily but will generally be charged monthly. Check with your lender to see how they calculate and charge interest.

So, let’s say you have a home loan with a balance of $400,000, and you have $20,000 in your 100% offset account for the life of the loan. Your lender will offset that $20,000 balance against your home loan’s balance and subsequently only charge you interest on $380,000 – despite your actual home loan balance being $400,000. At a rate of 6% on a 30-year home loan term, that $20,000 difference would save you more than $87,000 in interest and shave over three years off the total loan term.

You generally won’t earn interest on any savings held in an offset account, as the balance is being used to reduce the interest payable on your home loan. The balance of your offset account won’t grow unless you’re contributing to it. However, that’s okay as an offset account can be a more effective use of your money than a conventional savings account.

The money held in your offset account is still fully available to you. However, keep in mind that any withdrawals you make will reduce the balance that’s being ‘offset’ against your home loan balance.

Using the example above, if you made a $10,000 withdrawal from your $20,000 offset account, your offset account balance would fall to $10,000, and you would be charged interest on $390,000 from the date the $10k was withdrawn.

This would then see the amount you saved on interest during the loan term reduce, as most lenders charge interest daily, and would increase the time required to pay off the loan compared to if you had $20,000 in your offset account.

The key to making a mortgage offset account work is to maintain enough of a balance to make it worth your while. Offset accounts aren’t free. Lenders in Australia will generally charge you a monthly or annual fee or a higher interest rate for the privilege of having an offset account, so you need to make sure it’s saving you enough money in interest to outweigh those fees.

There are two types of offset accounts available:

• 100% offset accounts. These are the most common form of offset account and are typically available with variable home loans, although you can find fixed rate home loans that offer an offset account. These accounts offset their full balance against your home loan balance, and therefore interest is only calculated on the outstanding net amount.
• Partial offset accounts. These use a portion of your offset account balance to reduce the interest payable on your home loan. This is typically expressed as a percentage (e.g. 50% or 75% offset). Some other lenders may offer partial offset accounts that use the full balance of the account, but instead charge a lower rate on the full balance.

Partial offset accounts tend to be less efficient than 100% offset accounts, although this will depend on your objectives and the home loan terms in question. You may decide that a particular home loan is the best-value option for you compared to the rest of the market based on its fees and features, even though it only offers a partial offset account.

Whether you’re a first home buyer looking for an investment property or refinancing, you can compare your range of home loan options here.

Offset accounts are typically available on variable loans and are less likely to be offered as a feature on fixed home loans. Some lenders offer a fixed rate home loan with an offset account, but these may have restrictions. This could include things like minimum and maximum account balances as well as fees for depositing and withdrawing money. Always check the key fact sheet of any home loan product you’re considering, so that you’re not caught out by any of the fine print.

Investment home loans can also come with offset accounts, it’ll just depend on the loan itself. Like owner-occupier loans, offset account loans are more likely to charge slightly higher fees, and interest rates and are less common on fixed-rate loans.

Offset accounts can help you save money

An offset account can save you money on your home loan interest payments, which can ultimately help you pay off your home loan faster as it reduces your interest payable without affecting the principal component of your home loan repayment.

Something else to consider is that a mortgage offset account also functions as a transaction account, meaning you can use it just like an everyday account and make withdrawals or deposits. But remember, the more money you withdraw, the less your mortgage balance will be offset by. Conversely, the larger your offset account balance, the less you will pay in interest.

Offset accounts are flexible

The money in an offset account can be accessed at any time, which is handy for several reasons. By having those funds on-hand and readily accessible for any emergency you may encounter, an offset account can provide a more flexible and easier-to-use option than a redraw facility, which could involve withdrawal fees and minimum or maximum withdrawal amounts.

And as mentioned, offset accounts can be used like any ordinary savings or transaction account. You can even have your regular salary deposited into it, which will help to increase the amount you’re offsetting against your home loan.

Remember that the interest on your home loan is typically calculated daily, so even if your salary is spent or saved elsewhere, the time it spends in your offset account will help to reduce your interest payable for the relevant period.

You can even set up direct debits for any regular bills or payments you need to make out of your offset account, as well as attach a debit card to assist with everyday purchases. If you have an offset account, it’s generally considered good practice to try and make regular contributions to the offset account balance, either by depositing regular savings in it or by making larger lump sum deposits.

The answer to this question will depend on how much spare cash you have floating around on a regular basis. If you can afford to make additional repayments towards your home loan, doing so will help pay down both your principal and interest (depending on whether you’re currently on a principal and interest loan or an interest-only home loan), whereas a mortgage offset account only reduces the interest that you’re charged without affecting your principal.

That being said an offset account gives you easy access to your money, whereas making additional repayments towards your home loan means that money is now locked up in the form of equity – unless you have a redraw facility, and even then, you may have to pay a fee to access it.

However, there’s no rule that says you can’t make additional repayments on a home loan and have a mortgage offset account. You’ll need to weigh up the pros and cons of both, which we’ve outlined here:

A redraw facility is a feature attached to your mortgage account that allows you to withdraw any additional loan repayments you’ve made. For example, if you’ve paid an extra $20,000 off the loan on top of your minimum repayments, your lender may allow you to withdraw up to that amount or up to the current loan limit. Any amount withdrawn will subsequently be added to the principal amount owing.

Making additional payments towards your home loan can be beneficial as it may help you pay off your loan faster and reduce the interest you pay over the life of the loan.

However, as mentioned, redraw facilities may come with withdrawal fees and stipulated withdrawal limits. While this shouldn’t necessarily be a dealbreaker, it does make it crucial to compare your options across the entire market and, if you want a home loan with access to a redraw facility, find one that works for you.

It all depends on your personal priorities and financial situation. An offset account is an everyday bank account that also reduces the interest on your home loan, whereas a redraw facility gives you access to additional money you have previously paid towards your home loan. Both can be useful; it’s up to you to decide whether they suit your needs and long-term financial plan.

In terms of having access to your funds, offset accounts act like any typical transaction account, as the balance is available for you to withdraw or move at any time. Redraw facilities only allow access to extra repayments you have made on your home loan up to the current loan limit, whereas you can immediately access all the funds in your offset account in most cases.

When withdrawing money through a redraw facility, you might need to apply to do this and potentially wait a day or two before you can access your funds. Refer to your lender’s terms and conditions and read the product fact sheet to understand how your redraw facility works.

Regarding account-keeping fees, having an offset account on your home loan will typically be more expensive than more basic home loans that may come with a redraw facility.

Check whether there’s a redraw fee for using your home loan account’s redraw facility, and compare both the interest and comparison rates of any home loan products you’re considering.

This is entirely up to you and will depend on the various interest rates on offer across the savings and offset account markets. It’s worth noting that these accounts do slightly different things.

A savings account will earn you interest on your own money, while an offset account will help you pay less interest on the bank’s money, which they lent you to buy a house with.

With this in mind, the interest you earn using a savings account will be subject to taxation, whereas the interest you don’t have to pay using an offset account is money saved rather than money earned and will therefore not be subject to taxation.

You’ll want to take a look at the average interest rates for both products at any given time and decide which one will work better for you. For example, say that home loans have higher interest rates than savings accounts at the moment; this means that any money you place in a mortgage offset account will generally ‘work harder’ than funds stored in a savings account, by saving you more money than the savings account could earn you in the same period.

Of course, money sitting in a mortgage offset account will not grow unless you deposit more funds into it, as it does not attract interest. Savings accounts, on the other hand, help grow your wealth as they attract additional interest, so deciding between them is up to you and may depend on what your primary goal is: paying off your home loan faster or building up additional savings.

Banks and lenders generally won’t require you to have a minimum amount of money in your offset account before they start offsetting this against your home loan balance. However, this may differ from lender to lender, so check before committing to any specific home loan product.

You’ll generally have a debit card connected to your offset account. The offset account essentially acts as a transaction account and having a debit card makes it easier to access the cash it holds.

To get your salary deposited straight into your offset account, you’ll need to get in touch with your employer or payroll office to provide them with your offset account banking details. Your bank or lender can supply you with the specific account details you’ll need to give to your employer.

Most lenders will allow you to open multiple offset accounts, whether for more than one home loan or for a single loan. You might want to consider this if you’re having your salary deposited into your offset account and want to divvy the money up for different purchases (e.g. car payments, household bills, etc.).