Paying off your mortgage vs leaving money in your offset account

Paying off your mortgage early saves you money. But keeping that money in an offset account instead of paying the loan off gives you more options.

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By

Richard Whitten

&

Sarah Megginson

Updated

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Key takeaways

  • If you're saving money in your offset you have 2 choices: keep it there or pay it into your loan.
  • By saving money in your offset account you keep the credit facility open while paying minimal to no interest.
  • By paying off your home loan instead you rid yourself of debt and any monthly repayments.

It might seem counter-intuitive to not pay off your home loan if you have the money to do so, but keeping your money in your offset account instead could be a better option.

Because here's the thing about owning property: Your home might be worth a lot, but it's hard to turn bricks and mortar into cash when you need it. The money in your offset account opens up far more financial possibilities than repaying the loan and having no cash left.

When you have enough money to pay off your home loan

Whether you have enough money to pay off your home loan or you're almost there, you've got a couple of options. You have 2 options now:

  1. Pay off your mortgage. Use the money to pay off the loan completely. You're now out of debt. But you have $0 left in the offset account. If this is the bulk of your savings, you now have none.
  2. Keep the loan open. Continue to add to your offset account, but don't close out the loan. You'll continue to make monthly repayments, but these will go to the loan principal and not towards interest. This means you have a lot of money you can easily access in the offset.
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Expert insight

"The answer to this really depends on your purpose and the way you bank – I am an automated banker, I need everything to run on it's own so offset is perfect for me – but if I wanted to stash some money away the redraw is "out of sight, out of mind', and that works well for a lot of our clients. Investor clients without any personal debt will find the offset avoids the wrath of their accountant."

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Mortgage broker and founder, Two Red Shoes

What if there's more money in your offset account than your loan?

It's possible to put more money in your offset account than the loan itself. But there's not much point. Doing this doesn't automatically close your loan account. You'd still need to discharge the loan.

But once you've saved more than the loan itself, you're not getting any benefit from offsetting interest. And your lender won't start giving you interest on top, like a normal savings account.

So you're better off keeping your offset balance just below your loan amount. Then you can use extra cash to start building up your savings separately, in something like a high interest savings account or a term deposit.

What to be aware of when considering repaying your home loan

Money in an offset account is yours, extra repayments are not

This is the key thing to understand. Money in an offset account is cash you can spend. But once it's gone to pay off the loan, it's gone. And once you pay the loan off and discharge the mortgage, the lender takes the money from your offset to cover your loan debt.

If you have plenty of savings in another bank account, it makes sense that you'd want to pay off your debt. But if you have no other savings, that offset account gives you more financial options than paying the loan off and having no money.

Even if you only have a small amount of cash, an offset account is a good move

Even if you only have $10,000 to put into an offset account, this works better than making extra repayments. You could still use that $10,000 in your offset account in an emergency.

It's true that lenders often let you take extra repayments back out of the loan if you need to access some cash. This is called a redraw facility. But there are often fees attached, or restrictions on how much you can access. Whereas money in an offset account is all yours.

Learn more about offset versus redraw

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"I have an older relative who chose not to keep her home loan account or offset open once the loan was paid off, because the $400 annual fee seemed unnecessary. But now she regrets it – it was essentially a $40k line of credit with a low interest rate of around 6%, which is a lot cheaper than other forms of credit. She's now in her 70s, and if she has to buy a car or has an unexpected expense, she'll have to jump through a lot of hoops to get any type of credit approved. Sometime, it's worthwhile paying the fee and keeping the account open."

Money expert + media spokesperson

Keeping money in your offset account vs paying off the mortgage

Keeping money in your offset

Pros

  • If your remaining debt is small then it's not costing you much to keep it, and you can use the money in the offset account for emergencies, investments or other expenses.
  • If something goes wrong you can easily take money out of your offset account and access it, fast. If you have a separate account with money in it for emergencies, this is less of an issue.
  • If you decide to move or buy a second property you can use the funds from your offset account to cover the deposit.
  • You could buy a second property and live in it while turning your current home into an investment. This allows you to shift money to the mortgage on your new home and keep paying off the investment (this is advantageous because you can deduct interest expenses on an investment property from your tax).

Cons

  • Withdrawing money from your offset account means you pay more interest.
  • Even though you're not paying any interest (if your offset amount is the same as your loan amount), you'll still need to make your mortgage repayment each month. You'll keep doing this until the full loan principal amount is repaid.
  • If your mortgage has ongoing fees you'll keep paying them as long as you keep the mortgage. This cost could be minimal, but it's something you need to consider.
  • Having a mortgage is just one more thing to worry about, and this strategy does require you to pay more attention to your finances.

Paying off your home loan

Pros

  • You're out of debt and you own your own home.
  • No mortgage means no fees. Easy.
  • If you just want to get out of debt then you might want to repay the mortgage and never hear the word "mortgage" again.

Cons

  • As soon as you pay off your mortgage, all the money in your offset account is gone. Congratulations, you own your own home. But it's hard to take money out of your house.
  • It can be harder to sell your property then buy a new one. If it doesn't work out you might need a bridging loan or a line of credit to cover your deposit. This means extra work and potentially extra costs.

The above information might not apply to you, of course. Your loan might not have an offset account, in which case you've just been paying your loan off. And you might have extra savings set aside, meaning having the flexibility of the offset account is less important to you.

Also, you might be the kind of person who just wants to close their mortgage and move on with their life.

Consider chatting to a financial planner or a mortgage broker to get advice tailored to your personal situation and needs.

Max keeps his home loan going and makes the most of his offset

Mortgage vs offset - maxIn this hypothetical scenario, Max has $250,000 left to repay on his mortgage. He also has $250,000 saved in a 100% offset account.

But thanks to the balance in the offset account cancelling out his outstanding debt, Max doesn't have to pay any interest on the loan amount. So rather than paying off the loan in full, he could keep making his regular loan repayments and still have access to the $250,000.

He decides to put the money he is saving on interest repayments into a high-interest savings account to further boost his savings balance. Later on, when Max's car breaks down he pulls $10,000 out of the offset account to buy a new car. His offset dips down to $240,000, meaning he has to pay interest on the $10,000 as he pays it back. This is still much cheaper than getting a car loan, not to mention much easier and less stressful.

Frequently Asked Questions

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Sources

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Senior Money Editor
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Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University. See full bio

Richard's expertise
Richard has written 755 Finder guides across topics including:
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Money expert + media spokesperson

Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards. See full bio

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Sarah has written 221 Finder guides across topics including:
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8 Responses

    Jarrod's avatar
    JarrodMarch 11, 2023

    Also consider that offset accounts are guaranteed against bank failure only up to $250,000 – so presumably any money in the offset account above that amount might be lost if your bank goes under. This would seem to be a point in favour of paying off the loan rather than leaving money sitting in an offset account.

      Richard Whitten's headshotFinder
      RichardMarch 16, 2023Finder

      This is true, although in most cases a lender going bankrupt will get bought by another institution. I don’t think there’s a case in modern Australia where a lender has gone bankrupt and borrowers with offset accounts have lost out.

      But it’s worth keeping in mind all the same.

    Wendy's avatar
    WendyFebruary 7, 2023

    I have a fixed home loan due to expire in August. I owe $250k but have $120k in offset. I don’t understand why i have only paid 10k off the total amount owing (in the past 12 months). I pay the minimum monthly payment. Should i change to weekly or fortnightly repayments?

      Sarah Megginson's headshotFinder
      SarahMarch 2, 2023Finder

      Hi Wendy,

      We’re unable to provide personal advice, so it’s best to contact your bank directly about your situation.

      However we can share that your mortgage repayment is comprised of two parts: one part is the principal (repaying the overall debt) and the other part is interest.

      In 12 months, you’ve repaid $10k worth of principal and the rest of your repayments were going towards interest.

      Generally, offset accounts are not available to offset the interest in a fixed rate mortgage, so it would be worth checking with your bank to double check you’re getting the benefit here. If you’re not (or even if you are!) you might be able to get a better return on your money by placing it in a high interest savings account.

      Hope this helps!

    Nico's avatar
    NicoSeptember 8, 2022

    My offset equals my loan, but as interest rates have increased so have my minimum monthly repayments. If the life of the loan hasn’t changed and I’m apparently no longer accruing interest on the loan amount then why would the minimum monthly repayments are increase?
    When I asked my bank this question they could not (would not) give me an answer I could understand.

      Rebecca Pike's headshotFinder
      RebeccaSeptember 16, 2022Finder

      Hi Nico,

      We understand how confusing repayments can be but as a comparison site, we’re unable to comment on how your lender works out its repayments. It would still be best to discuss it with them. If their explanation is confusing, don’t hesitate to ask questions or clarification as they’d be happy to break it down for you. You could also talk to a mortgage broker who would be able to work through your situation to see if it’s still the best loan option for you.

      All the best,
      Rebecca

    Raj's avatar
    RajJune 23, 2017

    I have a home loan of $400,000 an offset of $400,000 with redraw amount of $200,000. Will it be beneficial for me to transfer $200,000 from the offset account to home loan account and use the balance $200,000 in the offset account for other investments?

      Jonathan's avatar
      JonathanJune 24, 2017

      Hi Raj!

      Splitting your money from the offset account so that some of it goes to an investment is never discouraged, as long as you know it might give more money in the long-run. :)

      You can consult a list of financial advisers to help you decide on this matter based on your situation.

      Hope this helps.

      Cheers,
      Jonathan

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