What is an offset account and how can it shave time and money off your mortgage?
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- Minimum borrowing: $150,000
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An offset account is a bank account attached to your home loan. Every dollar you keep in your offset account reduces (or offsets) the total remaining loan amount as long as it's in there. This means you pay off the loan faster and pay less interest.
Putting money into an offset account is like making extra mortgage repayments, except you can withdraw the money and spend it when you need to.
How do offset accounts work?
Here's an example:
- Your mortgage is $150,000.
- You have an extra $20,000 saved up, which you put into the offset account.
- Now your lender charges you interest on $130,000.
- Your monthly repayment stays the same, but you're repaying the loan faster and paying less interest.
In this hypothetical situation, interest is applied to $130,000 instead of the full $150,000 owed. It's really all about speed. The offset account money acts like extra mortgage repayments, which shortens the life of your loan. And a shorter loan means less interest paid.
Offset account calculator
Use our calculator below to calculate the time and interest you can save on your mortgage when you put some money into an offset account.
All you need to do is enter:
- Your mortgage details
- The money you will put into the offset account
- How far into your mortgage you currently are in years
That last point is important. If you put $10,000 into your offset account and leave it there for a decade you'll enjoy a bigger benefit than if you only saved it in the last year of the loan.
Here's an example using the calculator above.
- Your mortgage is $150,000 and your interest rate is 4%. The loan term is 30 years.
- Your monthly repayment is $716
- But you decide to put $20,000 into the loan's offset account. Now you only pay interest on $130,000.
- Your monthly repayment stays at $716, but if the money stays in your offset account you'll repay the loan in under 26 years and save $37,856 in interest.
Can I withdraw money from my offset account?
Yes. It functions like just a normal savings account, except the money doesn't generate interest. So you could park your emergency savings (if you have any) in your offset account and reduce the amount of interest you pay right away. But if you suddenly need the money you can just pull it out again.
If you take the money out of your offset account you start paying more interest again. But you would still see a benefit from keeping the money in the offset account for some time.
Partial vs 100% offset
Most offset accounts are 100% offsets. Every dollar in the account offsets the loan principal in full.
But some mortgages come with partial offset accounts. With these accounts, you could put $1 in the offset and it would only offset 40% of the dollar. Partial offset accounts are less common and are sometimes found in fixed rate mortgages.
Common questions about offset accounts answered
Do my repayments get smaller with an offset account?
No, your repayments will stay the same with an offset account. What will change is the proportion of the amount of your repayment which goes towards the loan amount and the amount that goes towards interest.
Because the offset account lowers the interest due on your loan, more of your repayment goes towards the actual loan amount, known as the "principal".
Does my mortgage need to be from the same lender as my offset account?
Yes. The offset account is linked to the mortgage and must come from the same lender.
Does an offset account earn interest?
No. Unlike the money in a normal bank account, you don't earn interest on the money in an offset account. But savings interest rates are usually lower than mortgage rates and your loan principal is probably much bigger than your savings, so offsetting the mortgage principal will usually save you more money than you could generate in interest.
Is a redraw facility the same as an offset account?
No. They can function in a similar way because a redraw facility allows you to pull extra repayments out of your mortgage. The extra repayments lower your interest (same as offset savings) and you can still use the money as required.
But a redraw facility is much less flexible or convenient than an offset account.
Can investors use offset accounts?
They can and there are a variety of strategies they can use. Read more about how investors can use offset accounts.
I heard there's a tricky way to use a credit card and maximise my offset savings?
Yes, there is. You need a credit card with a long interest-free period and you need to be disciplined. Essentially, you do all your spending on your credit card and have your salary paid straight into your offset account. You keep all the money there offsetting your interest. Then, when your credit card repayment is due, pay it all off.
This works because the more money you put in your offset and the longer you save it there, the greater the benefit. Just make sure you keep your spending under control and pay your card off before the interest kicks in. Read more about the credit card with offset saving strategy.
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