What Is a Home Loan Offset Account and How Does It Work?

The rapid growth of housing credit has seen a significant increase in a loan product known as an offset account. Offset accounts are helping Australians pay less interest on their home loans while also speeding up the repayment process.

With Australian offset account balances growing annually by 30%, now may be the time to discover the ins and outs of these accounts.

At Lendstreet, we specialise in home buyer guides that keep everyone informed about lenders’ products. In this article, we’re going to break down everything you need to know about offset accounts and how they work. Our aim is to also show you how an offset account is one of the best ways you can save on your mortgage.

We’ll explain the different types of offset accounts, how you can save money using one, and how they differ from redraw facilities and regular savings accounts.

What Is an Offset Account?

An offset account is simply a transaction account that is linked directly to your home loan. It functions similar to a savings or deposit account, but the account balance is offset against an overall home loan balance.

Therefore, interest is only charged on the difference between this offset balance and the total home loan amount. An offset account is just like an everyday bank account, but each payment made counts towards lowering the interest on a home loan.

As an example, if you have a $550,000 home loan and $100,000 in your offset account, you would only pay interest on $450,000.

Types Of Offset Accounts

There are two main types of offset accounts: 100% offset accounts and partial offset accounts.

A 100% (or full) offset account allows you to use the entirety of the offset balance against the home loan. Like the example above, the entirety of the account balance will be offset against the home loan, so nothing is being wasted. Generally, 100% offset accounts are available with variable-rate loans.

A partial offset account means that only part of the balance is used against the home loan. Generally, partial offset accounts are attached to fixed-rate home loans.

So, if your partial offset account was at 50% with a balance of $100,000 and the home loan balance is $550,000, you would be paying interest on $500,000 ($500,000 – 50% of $100,000) not $450,000 ($500,000 – 100% of $100,000).

How Do I Use an Offset Account?

As you’ve seen, an offset account works like a regular transaction account. All or a portion of the money in that account is used to reduce the interest charges on your home loan.

There are many different ways to use an offset account. One way is to have your monthly pay deposited directly into the offset account and to use it as an everyday transaction account.

Using an offset account like this means that your home loan interest rate will decrease each time transactions are made, especially if you have a 100% offset account! 

Another way to use an offset account is to treat it like a savings account. Money can be put to one side for any future situation, and it’ll also offset the amount against your home loan. As it’s just like any other transaction account, money can be both deposited and withdrawn when needed.

How Much Money Can I Save?

The main benefit of an offset account is that money is saved by reducing the amount of interest you pay each year. If you set up an offset account like an everyday transaction account or find time to put all your spare cash in, you’ll effectively be lowering your home loan interest.

As a popular product with Aussie homebuyers, consistently paying into an offset account and keeping the money in there can save you thousands of dollars a year.

Here is how much you could save with a 30-year $500,000 home loan at an interest rate of 5% while having an offset balance of $10,000:

1. With $10,000 in your offset account, you’ll pay 5% interest on $490,000, not $500,000.
2. This means you would pay $24,500 in interest per year, rather than $25,000, saving $500 per year (this amount will stay the same as long as the offset balance remains at $10,000).

If you increase the balance in your offset account then the more you’ll save over the life of the home loan.

In summary, as long as you maintain a steady balance in your offset account (and even add to this amount anytime you can), you can save hundreds to thousands of dollars in interest every year!

Does An Offset Account Reduce Monthly Repayments?

With an offset account that reduces the amount of overall interest you pay on the home loan, your monthly repayments will let you pay off the entirety of the loan sooner.

Why’s this? Well, when you have an offset account, your monthly repayments generally stay the same. However, because you’re now paying less overall interest with an offset balance, this means that more of your repayments are going directly to paying the principal rather than the interest of the home loan.

Advantages Of an Offset Account

There are many advantages to having an offset account. Not only can you be saving thousands of dollars a year, but an offset account provides flexibility and potential tax benefits.

Take your time to read through these and see whether they suit your current and future financial situation. If you’re planning on securing a variable-rate home loan with a 100% offset account, then you’ll benefit from all the advantages below.

Flexibility

While depositing money into an offset account ultimately reduces the amount of interest you pay, these accounts are also very flexible with withdrawals.

The majority of lenders allow borrowers unrestricted access to whatever money is in there. So, you can keep money in there just like any other savings account, but you’re saving money on your home loan. Then, if you hit any financial trouble, you can simply withdraw the money.

Savings With High-Interest Returns

The interest rate that is charged on your home loan is generally more than the interest rate on a regular transaction account. This means that although the money in your offset account does not receive any interest, the interest you save on your home loan will more than likely outweigh any interest on the offset amount.

Your Interest Is Calculated Daily

One of the greatest benefits of an offset account is that there’s no delay when you deposit money. Interest is calculated daily, so the money you put in today, tomorrow, or next week will immediately impact your home loan balance.

So, if you have an offset account with a slow increasing balance, the interest deductions on your home loan will be recalculated each day the amount changes.

Length Of Loan Can Be Reduced

When your monthly repayments stay the same but the interest rate on your home loan is lower, the quicker you can pay off the loan. In other words, each time you deposit money into your offset account and keep your repayments the same, the shorter your loan length will be.

Tax Benefits

What some customers don’t realise is that because your offset balance doesn’t earn interest, it’s not considered by the government as taxable income. Effectively, you’re saving money by reducing your home loan interest and also reducing your tax bill.

Perfect For Windfall Gains

Many people benefit from an offset account if they have a big sudden monetary gain at once. This may come in the form of a bonus from work, inheritance, or any other windfall win.

In these situations, homeowners can put the money straight into an offset account and begin to save thousands of dollars on their home loans.

Disadvantages Of an Offset Account

While offset accounts may seem like a no brainer, there are some disadvantages to keep in mind. Choosing an offset account may result in higher home loan interest rates and the need for a larger deposit.

Higher Fees

Firstly, a home loan that has an offset account attached may lead to additional fees. You may need to pay higher monthly or annual fees, so check with a lender what an offset account entails for you.

It’s also important to get in touch with a mortgage broker with knowledge of offset accounts. At Lendstreet, we’ve guided many homebuyers through the complicated terms and conditions of offset accounts and made sure it suits their financial situation.

Larger Deposits

For an offset account to be effective, you’ll need to have a significant amount in there. This means that deposits are usually quite large.

Just think, a 30-year $500,000 home loan at an interest rate of 5% with an offset balance of $10,000 will save you $500 a year. But, if you only had $1,000 in your offset account then you’d only be saving $50 a year.

If you’re worried about whether your potential deposit sizes suits an offset account, come and chat with a broker at Lendstreet.

Higher Interest Rates

Another thing to look out for with offset accounts is that these home loans usually have higher interest rates. Even though you’ll be saving on your home loan, the interest rate will be higher than a loan without an offset account attached to it.

Some Financial Control Is Required

Finally, many customers with an offset account have to be more financially disciplined. If you regularly deposit and then withdraw from your offset account, you’re not going to benefit from reduced interest rates.

Redraw Facility

At Lendstreet, we get asked what’s the difference between an offset account and a redraw facility. Well, they are similar in many ways, but they also have some differences.

A redraw facility is an attachment to your home loan that allows you to make extra repayments. Much like an offset account, you can redraw these funds.

Sounds very similar? But wait, because a redraw facility is not the same!

Tell Me the Difference Between an Offset Account and A Redraw Facility?

The significant difference between an offset account and a redraw facility is that limitations are placed on a redraw facility. The main limitation concerns the number of times you can redraw every year.

With a redraw facility, you’ll only be able to withdraw money from the account a set number of times per year. There is also a limitation on the withdrawal amount, and you will be charged a fee each time you redraw.

The differences, then, between an offset account and a redraw facility concerns flexibility and accessibility.

What’s the difference between an offset account and a savings account?

Generally speaking, your money will help you save more in an offset account rather than a normal savings account. This is because the interest rate on a home loan is higher than what your savings account earns from interest.

With a savings account, you earn interest on whatever balance is in that account. But with an offset account, your balance is always working towards reducing interest on your home loan.

There are more transaction options available with an offset account than there are with a savings account. This also means that there are fewer interest penalties with an offset account.

What To Look for In an Offset Account

Before choosing an offset account with your home loan, there are several things to look out for. Remember that this type of account is all about flexibility, so make sure your lender is following through!

Check For No Balance Limit

If your offset account has no balance limit, then you can use it any way you want. You can begin to accumulate as much or little as you like and begin to benefit from lower home loan interest rates.

A 100% Offset Account That Is Calculated Daily

Having a 100% rather than partial offset account will let you gain all the benefits possible from such an account. You should also check with your lender how the interest rate is calculated.

You will want an offset account that calculates your interest rate whenever a new deposit is made without any delay.

Lower Interest Rate Credit Card

More often than not, lenders with offset accounts can benefit from credit card offers with lower interest rates. This is another way to help save towards your home loan because a low-interest credit card will help with any unexpected renovations.

Is An Offset Account Right for You?

Having read this article, are you now ready to secure your offset account? At Lendstreet, we understand that everyone is different, which means that everyone’s home loan is different too.

However, you may want to know what right offset account is right for you. That’s where we come in. There are many offset products available from a number of different lenders. You may need an offset account for your first home, for an investment property, or renovation purposes.

At Lendstreet, we have a streamlined knowledge of the most popular lenders (and those not known to everyone). We also do all the financial legwork to find the product that is right for your circumstances.

Feeling like you’re ready for a chat? Why not book an appointment with us, and we can discuss your next home loan.

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FAQ

Is It Worth Having an Offset Account?

An offset account is perfect for those homeowners that want to reduce their interest rate and pay off their home loan sooner. Essentially, an offset account keeps any excess funds you have and takes that balance off your overall home loan amount. Money in an offset account can also be withdrawn at any time.

Does An Offset Account Reduce Monthly Repayments?

An offset account will not directly affect the amount you pay each month. Instead, the money that you have in your offset account goes towards lowering your home loan. This means that when you make your monthly payments, more money will be going towards paying off your principal rather than the interest.

How Do Mortgage Offset Accounts Work?

An offset account works like a regular transaction account that is linked directly to your home loan. However, whatever money that you deposit into it will be offset against your overall home loan balance. So, interest is only charged on the difference between the offset balance and the total home loan amount.

Does A Fixed Home Loan Have an Offset Account?

It is possible to have an offset account attached to your fixed-rate home loan, but you won’t be able to benefit from a 100% offset account like you would with a variable-rate home loan. A partial offset account means that only part of the balance is used against the home loan.

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