What is a home loan offset account?
An offset account is a home loan feature that allows you to use your cash savings to reduce the amount of interest you pay on your loan. It can mean big savings on your mortgage and shave years off your loan.
An offset account is basically a transaction account linked to your home loan. The balance of the account reduces or ‘offsets’ the balance of your home loan that interest is charged on.
“If you have more than $20,000 in savings and/or you are willing to have your income paid into your offset account, there is usually a net financial benefit,” explains Money’s home loans expert and mortgage broker, Mansour Soltani.
How do I find the best offset home loan?
Compare interest rates from different lenders
Some lenders charge a higher interest rate for home loans with an offset account. For example, a bank may offer an interest rate of 5.95% p.a. for a loan without an offset, but charge 6.15% p.a. for a loan with an offset. Make sure you compare rates from multiple lenders to find the best deal on loans with an offset account.
Check the offset account features
These can differ between lenders. For example, some banks let you link multiple offset accounts to your home loan, which helps you separate savings for different goals, like an emergency fund, holiday savings, or bills. Some lenders allow up to 99 offset accounts, while others may offer a transaction card for easy access to your funds.
Are there any fees or conditions?
Some loans have annual package fees or monthly/ongoing fees that can add up and reduce the benefits of your offset account. Also, check if there is a minimum balance requirement, as some lenders may require you to keep a certain amount in the offset account to get the full benefit of reducing your mortgage balance.
Is it fully or partially offset?
A fully offset account means that 100% of the money in the account is deducted from your home loan balance before interest is calculated, helping you save more on interest. On the other hand, a partially offset account only uses part of your balance to reduce the loan amount for interest calculation, meaning you’ll save less on interest.
How does an offset account work?
If your home loan has an offset account, you can deposit money into it and make withdrawals as you would with a standard transaction account.
This could be your cash savings, salary payments and any lump sums you happen to receive – your end-of-year tax refund, for example.
Your offset account will also generally come with a debit card, meaning you can use it for day-to-day spending and to pay bills.
The key difference with a mortgage offset account is how it works alongside your home loan. When your lender calculates the interest charged on your home loan, it deducts the balance of your offset account from your home loan balance.
This means you’re charged interest on a lower amount, which saves you money.
Keep in mind that the money in your offset account won't lower your required monthly loan repayments. Instead, it reduces the amount of interest you’ll be charged each month, which can help you pay off the loan faster and save on interest over time.
Some home loans with offset allow you to have multiple offset accounts, meaning you can split your money across different accounts. The combined balance of the accounts will offset your home loan balance.
Full vs partial mortgage offset
100% offset
This means every dollar in the offset account contributes towards reducing your home loan balance for calculating interest. A home loan with 100% offset offers the biggest potential interest savings. Full offset is more commonly offered on variable rate loans.
Partial offset
A home loan with partial offset means only a portion (e.g. 50%) of the offset account balance reduces your interest costs. Alternatively, a reduced interest rate could be applied to the full offset balance. Partial offset is less common but is a feature of some fixed-rate loans.
Case study:
How a home loan offset account saves Sean $2,800 per year
Learn how Sean Callery, Money's Editor, uses an offset account to save him thousands per year.
How to use your offset account (3 tips from a broker)
We asked mortgage broker Rebecca Jarrett-Dalton of Two Red Shoes for her take on some of the common strategies borrowers with a mortgage offset account may use.
While there are a few ways of setting it up, she said in her experience fitting the offset account around existing ‘“good baking habits” that are serving you well can work best.
“It's much easier to do that than to try and teach someone new banking habits to fit around their home loan.”
1
Use the offset account as your main money hub
Rebecca says for people who primarily bank from a single account, an offset account could fulfil that role.
“Maybe they have one account with a chunk of money in there, all their bills come in and out of it and it’s also their wages account. They could be the perfect candidate for an offset account”.
Rebecca says this is the approach she takes herself.
“All my bills can come in and out of my offset account without me having to pay attention to that.”
2
Combine your offset account with a credit card
With this method, as much of your spending as possible goes on a low-cost credit card, which is paid off in full every month to avoid interest charges. The idea is to keep your offset balance as high as possible for as much of the month by using the credit card for spending.
Rebecca says this is a strategy many of her clients want to discuss but the outcome can be mixed.
“Depending on how much you're spending, this can save considerable amounts of interest. The challenge is if you're not using your own cash, you can overspend. You'll get tap happy.”
If you are exploring this strategy, choosing the right credit card is also key.
“Your credit card has to have little or no fees, you absolutely have to pay it off on time and you have to have a good interest-free period. So, for example, a 55 days interest-free period. Then set up your card so it’s paid off automatically.”
3
Use your offset account to save for your next property
According to Rebecca, some first-home buyers who eventually plan to purchase a second property (i.e. an investment property) use their offset account to save a deposit for property number two.
“We will set them up from the beginning to put the minimum repayments into the loan and keep building their future deposit for the next home in the offset. This can give you a nice chunky deposit to go into your second property.”
It’s important to get professional advice from a broker or financial adviser if you are considering any of these strategies.
How much does an offset account cost?
Home loans with an offset account tend to be more expensive than loans that don’t. The extra cost can come as a direct offset fee (e.g. $10 per month), as part of a home loan package fee (these can be up to $400 per year) or a higher interest rate.
Analysis by Money found that among the 40 lowest rate home loans for owner occupiers, only 6 (or 15%) of them offer an offset account.
For example, these two loans are identical apart from the offset account which adds 20 basis points to the interest rate.
The extra costs mean opting for a loan with an offset account isn’t right for everyone.
“There's no point in taking an offset unless you're going to keep a reasonable amount of cash regularly in that account,” Rebecca explains.
Your loan balance matters too.
“If you're paying a big annual package fee, once your loan balance gets below a certain level, the fee is now potentially more than the interest you could be saving.”
However, if you have a higher loan balance and a decent amount of money saved in your offset account, the interest savings have the potential to far outweigh the costs.
Of course, there are some loans with very competitive rates that offer an offset account at no extra cost. The key, as ever, is to shop around.
Pros and cons of using an offset account
Pros
- Can potentially save you a significant amount of money in interest.
- Can mean you pay off your home loan sooner as you're paying off more of the loan principal and less interest.
- Works just like a regular transaction account which most people use already.
- Because you are saving rather than earning interest, it does not impact your taxable income.
Cons
- May mean you have to pay an extra fee on your home loan or a higher rate.
- Unless you have a good amount of money in savings, it’s unlikely to make a big difference.
- If you want a home loan with an offset account, your range of loan options will be reduced (e.g. most fixed-rate loans don’t offer offset).
- If you switch home loans down the track, you may need to do some financial readjusting (e.g. changing direct debits, salary payments).
Offset account vs savings account
Home loan offset account
- Your savings reduce the balance of your home loan that interest is charged on.
- You save interest based on whatever your home loan rate is.
- Unless it’s a 100% offset account, only a portion of your savings will save you interest.
- Because you are saving, not earning interest, you won’t need to pay tax.
High interest savings account
- You earn interest on your savings.
- You earn interest at a variable rate set by your bank.
- You often need to meet certain criteria to qualify for the top rate of interest.
- You may need to pay tax on interest earned.
Is a mortgage offset account worth it?
Speaking from personal experience, our offset account is a simple, low-effort way for us to save money. Having bought our first home relatively recently, we still have a fairly high loan balance and the offset account is a good way for us to take the sting out of the interest costs.
We're not alone either. The average mortgage in Australia is now well in excess of $600,000, and tools like an offset account have become particularly important for borrowers as rates have risen significantly in recent years.
We do pay a higher interest rate than we could probably get elsewhere, but it’s a net positive for us.
But as Rebecca explains, it’s not right for everyone.
Rebecca Jarrett-Dalton, Mortgage Broker
“I would say probably 90% of borrowers I see say ‘I want an offset account’, or ‘I've heard I need an offset account’. But it's not a one-size-fits-all band-aid fix for borrowers. It comes down to how you use your money and how you bank. It's also not the only thing you can do that will save you interest.”
Rebecca Jarrett-Dalton, Mortgage Broker
