An offset account is one of the most useful mortgage features available. It's really just a bank account linked to your home loan. But here's the big difference: every dollar you store in your offset account will reduce your loan principal as long as it's there.
You can compare mortgages that come with offset accounts in the table below. Read on to learn how offsets can save you thousands of dollars and wipe years off your mortgage.
State Custodians Low Rate Home Loan with Offset
A low rate variable home loan offer available with no application and ongoing fees. Includes 100% offset facility.
- Interest rate of 2.65% p.a.
- Comparison rate of 2.67% p.a.
- Application fee of $0
- Maximum LVR: 80%
- Minimum borrowing: $100,000
- Max borrowing: $2,000,000
Compare home loans with offset accounts
The loans in the table below all have offset accounts (keep in mind that some may charge a small offset account fee).
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What is an offset account?
An offset account is like a bank account, but instead of earning interest for you it reduces the interest you pay on your mortgage.
If you save one dollar in your offset account and your loan amount is $200,000, your lender will calculate your daily interest charges on $199,999 as long as that dollar remains in the offset.
An offset account is an extremely useful feature because it lets you build up savings, spend cash when you need it and repay your home loan faster. Crucially, not all mortgages come with this feature.
How does a home loan offset work?
Let's say you have a $500,000 mortgage with an interest rate of 3.00% (full details below) and $20,000 in savings. Your mortgage would ordinarily look something like this:
- Loan amount: $500,000
- Loan term: 30 years
- Interest rate: 3.00%
- Monthly repayment = $2,108
- Total loan cost (including interest) = $758,887.26
But then you decide to move the $20,000 into your loan's offset account after 12 months of making repayments on your loan.
- Monthly repayment = $2,108
- New loan term: 28 years and 11 months
- Total loan cost (including interest) = $732,442.61
- Interest savings with offset = you will pay $26,444.65 less in interest over time
Your loan amount is now offset to $480,000. Assuming you leave your $20,000 saved in the offset and don't spend it, you'll finish your mortgage over a year earlier and pay $26,000 less in interest.
Quick offset tips
How much you can save using an offset account depends on multiple factors including your loan amount, interest rate, how much money is in the offset account, when you put it there and how long it stays there.
- Add early. If you add $10,000 to your offset account at the start of a 30-year loan it will save you more than if you added that money five years into the loan.
- Add often. If you can add extra savings into your offset account regularly you'll simply save even more in interest.
- Withdrawals. If you need to pull money out of your offset you can, and it's easy to do so. This will readjust the calculation on your loan repayments. But having the money in your account for any amount of time will provide some benefit.
Offset account calculator
Use our calculator below to estimate the time and money an offset account can save you. Just enter your mortgage details, the amount you will put into the offset account and how far into your mortgage you currently are.
Offset savings calculation examples
Here are some hypothetical mortgage scenarios showing how much time and money a single amount of cash in an offset account can save you. Note that all these estimates assume a 30-year mortgage with the offset money saved two years into the mortgage.
|Loan amount||Rate||Offset savings||Interest saved||Years saved|
|$350,000||3.25%||$34,000||$44,710||2 years 5 months|
|$450,000||2.59%||$50,000||$47,378||2 years 2 months|
|$600,000||2.90%||$40,000||$46,405||1 year 7 months|
|$800,000||3.00%||$50,000||$61,141||1 year 6 months|
Should I make extra repayments or put the cash into an offset?
At first glance an offset account seems similar to making extra repayments on your mortgage and using a loan's redraw facility to pull money out as needed. In both situations you get a reduction in interest charges, pay off your loan faster and still have access to your money. In theory.
But an offset account actually offers you more flexibility and control. Money in an offset account belongs to you. Extra repayments belong to your lender. Redraw facilities can come with restrictions or fees. And your lender can change the rules and make it harder for you to access the money.
Some lenders gradually fold your extra repayments back into your loan balance, meaning you can't access as much as you thought.
Money in an offset also gives you greater tax deductions if you convert a home to an investment. It also makes it easier to sell your home and buy a new one.
Selling your old home and buying a new one
It's hard to time the sale of your old home so it lines up with the purchase of a new one. And until your home sells you won't have a deposit to cover the new purchase. Many buyers in this situation take out a bridging loan.
But if you have been making extra repayments into your offset account you can simply pull this money out to cover your deposit. This gives your more time to sell and buy without worrying as much about timing.
Turning your home into an investment
Let's say you decide to convert your current home into an investment property and buy a new home. If you have paid off most of your mortgage you can't claim as much of the interest costs of your loan back on tax when turning the property into an investment.
But if you've put all the money into an offset account instead of extra repayments you can pull it all out to buy your new home and gain a full interest deduction.
Are there any disadvantages to using an offset account?
There aren't really any big downsides to using an offset account. But there are some issues you should be aware of.
- No interest gained. Unlike a savings account money in an offset account won't generate interest for you. But saving interest from a mortgage will generally net you a bigger gain than a savings account rate anyway.
- Some offsets aren't really offsets. Some lenders may simply label your extra repayments as an offset when it's really a redraw facility. This means you have less access to the money. Check that your lender is an authorised deposit-taking institution (ADI) and that your lender is part of APRA's Financial Claims Scheme.
- Partial offsets. Some offset accounts don't offset the amount deposited 100%. These are called partial offsets and they are much less beneficial for the borrower.
- Offset money only reduces your loan while it's saved. If you save $20,000 in an offset for four years and then spend it to buy a car your loan amount will re-adjust and you will pay more interest again. But every day money sits in your offset will produce some benefit to you.
- Your rate could be higher with an offset. Many lenders offer their lowest mortgage rates on "basic" products that don't have an offset account. And they offer a mortgage with an offset account with a higher rate. Our suggestion: shop around for a loan that has both a low rate and an offset account.
More articles and guides on offset accounts
Home Loan OffersImportant Information*
UBank UHomeLoan Variable Rate - Discount Offer for Owner Occupiers, Variable P&I Rate(*now 2.59%, drops to 2.49% on 17 Jul)
Take advantage of a low-fee mortgage with a special interest rate of just 2.49% p.a. and a 2.49% p.a. comparison rate.
Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR<=90% Incl. LMI (Owner Occupier, P&I)
Get one free online redraw per month and pay no ongoing fees. Application fees are waived for loans above $150,000. Refinance to an eligible Suncorp loan and get a cashback of $2,000 or $3,000, depending on your loan amount. Other conditions apply.
ME Flexible Home Loan Fixed with Members Package - 2 Year Fixed Rate LVR <= 80% (Owner Occupier, P&I)
Lock in a competitive rate for owner occupiers for two years. Comes with a 100% offset account.
Buy your home and lock in a low rate for the first two years. Get a $2,500 cashback when you switch to Virgin Money with a loan amount of $300,000 or more with an LVR up to 80%. You must apply by 28 August and settle by 30 October 2020.
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