An offset account is an everyday transaction account linked to your home loan. The money in it is subtracted from your loan balance before interest is calculated, so you pay interest on a smaller amount. Your savings stay fully accessible, but while they sit in the offset, they quietly reduce the interest you pay.
How an offset account works
Home loan interest is usually calculated daily on the amount you owe. With an offset, the lender calculates interest on your loan balance minus your offset balance.
You use the offset like any normal bank account. Your pay can go in, bills and direct debits can come out, and you can usually use a debit card. Every dollar sitting in the account, even for a few days, reduces the balance you’re charged interest on.
Your regular repayment amount usually stays the same. Because less of it goes to interest, more of it goes towards paying down the principal. Over time, that can help you pay off the loan sooner.
An illustrative example
Here’s a simple example with round numbers. It’s illustrative only and doesn’t reflect any particular loan.
- Home loan balance: $600,000
- Offset account balance: $50,000
- Balance interest is charged on: $550,000
In effect, the $50,000 in your offset earns you a saving equal to the interest you would otherwise have paid on $50,000 of your loan. And because that saving isn’t income you’ve earned, you generally don’t pay tax on it, unlike interest on a regular savings account.
As your offset balance grows, the saving grows with it. If your balance drops, so does the benefit. To see what this could look like for your own loan, try our offset calculator. Its results are estimates only.
Offset vs redraw
Both an offset account and a redraw facility let you use spare money to reduce interest, but they work differently.
| Offset account | Redraw facility | |
|---|---|---|
| Where the money sits | In a separate account linked to the loan | Inside the loan, as extra repayments |
| Day-to-day use | Works like a transaction account | Not designed for everyday spending |
| Access | Usually instant, like any bank account | Depends on the loan terms and the lender |
| Effect on interest | Balance reduces interest charged | Extra repayments reduce interest charged |
The difference is mainly about access and control. With redraw, the money has technically been paid off your loan. The lender may set minimum redraw amounts, charge a fee, or in some cases change or limit your access to redraw. With an offset, the money stays in your own account.
If you might turn your home into an investment property one day, the distinction can matter for tax purposes. It’s worth getting advice from your accountant before deciding where to keep your savings.
A note from Jenny An offset is most useful when you keep a meaningful balance in it. If your savings tend to stay low, a simpler loan with lower fees might leave you better off, and I’ll compare both options for you.
Fees and package costs
Loans with an offset account aren’t always free. Common costs include:
- An annual package fee, which often bundles an offset with other features
- Monthly account fees on the offset account itself
- A slightly higher interest rate on some loans with an offset, compared with a basic loan from the same lender.
To work out whether it’s worth it, compare the likely interest saving with the extra costs. If your offset balance is high, the saving usually outweighs the fees. If it’s low, a basic loan with a redraw facility might be the more cost-effective choice.
Things to check
- Full or partial offset. Most offsets are 100%, meaning the full balance counts. Some partial offsets only count part of it.
- Which part of the loan it’s linked to. Offsets are usually linked to variable loans. On a split loan, the offset is generally linked to the variable portion.
- Multiple offset accounts. Some lenders let you link more than one, which can help with budgeting.
- Make sure it’s actually linked. An ASIC review found some offset accounts weren’t properly linked to customers’ loans, so they paid more interest than they should have. Check your statements or banking app to confirm the offset is working, especially after refinancing or changing loans.
Used well, an offset account can reduce your interest costs while keeping your savings close at hand.
This information is general in nature and does not take into account your objectives, financial situation or needs. Lending criteria, terms, fees and charges apply and vary between lenders. Speak with us for advice about your circumstances.