Best home loans with offset accounts

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What is an offset account?

An offset account is a bank account, but instead of earning interest for you, every dollar you have in your offset account will reduce the amount of interest you pay on your home loan. Instead, the interest you pay will be calculated based on your loan amount minus the value in your offset.

Your monthly repayments stay the same, but you get out of debt faster.

While you don't earn interest on an offset account, the interest you save is usually at a much higher interest rate than you'd earn in your bank account.

How does an offset account work?

If your loan amount is $500,000 and you save $1,000 in your offset account, your lender will calculate your daily interest charges on $499,000.

As long as that $1,000 remains in the offset account, you won't be charged interest on that amount of your home loan.

The more money you have in your account, the greater your financial savings will be.

Offset savings example

• You have a $750,000 home loan with a 30-year loan term.
• Your interest rate is 6.00%.
• Total loan amount = $1,618,787
• Your monthly repayments = $4,497.
• You will pay $868,787 in interest over the life of the loan.

But what if you put $20,000 into your offset account at the start of the loan?

Your monthly repayments would still be $2,388. But now your loan term would shrink to 27 years and 6 months.

And because of this, you would pay $90,035 less in interest charges.

Using the above numbers, let's see how much you could save if you added money to your offset account 2 years into your loan.

The offset account is a magic little Aussie invention that lets you use every dollar twice, both for its intended purpose (holiday, school fees, emergencies, etc) and to save you lots of loan interest. To me, it's a must-have.

Nicole Pedersen-McKinnon
Freelance finance journalist

Offset account calculator

Use our calculator below to estimate how much time and money an offset account could 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.

How to save the most money with an offset account

How much you can save using an offset account depends on 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 money 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 5 years into the loan. Any amount, even $1,000, will have an impact over the long term.
• Add money often. If you can add extra savings into your offset account regularly, you'll save even more in interest. If you can, have your salary or wages paid directly into your offset account, so your money is offsetting your interest during the month (before you spend it).
• Limit withdrawals. If you need to pull money out of your offset account, you can and it's easy to do. It's just like withdrawing money from any bank account. This will readjust the calculation on your loan repayments, so try to keep as much money in the account as you can. For example, pay bills on the last possible due date so your money is offsetting your interest for a few more days.

Partial vs 100% offset account

Most offset accounts will offset your loan principal 100%, so every dollar you save in the account offsets your principal by the same amount, dollar for dollar.

Partial offsets only offset your loan principal to a specified percentage. For example, a partial offset may offset your principal by 60%, meaning $1 offsets your principal by 60 cents.

Partial offsets are significantly less beneficial and our calculator does not offer a partial offset calculation. It's not worth settling for a partial offset account when there are so many fully featured 100% offset account options available.

Should I make extra mortgage repayments or put the cash into an offset?

At first glance, using an offset account seems similar to making extra repayments on your mortgage and just using your loan's redraw facility to pull money out as needed. In both situations, you get a reduction in interest charges, you pay off your loan faster and you still have access to your money – in theory.

But an offset account actually offers you more flexibility and control. The key difference is that money in an offset account belongs to you while extra repayments belong to your lender. Redraw facilities can come with restrictions or fees and your lender can change the rules at their own discretion and make it harder for you to access the money.

Money in an offset account may also give you greater tax deductions if you convert your home into an investment property.

Learn more about redraw vs offset

What if my offset savings are equal to my loan amount?

If you save enough money, over many years your offset savings could eventually equal the amount that you owe on your home loan. This is obviously a great position to be in. But you have to decide what to do next.

You've essentially paid off your mortgage and if you want to end the home loan, you can move the offset savings over to the loan and then discharge the mortgage. Now you're debt-free.

However, all of your offset savings have now been spent. If this is the bulk of your savings, you will suddenly be very low on cash, which leaves you financially vulnerable if an emergency or unexpected expense arises.

You could decide to repay most of the loan, leaving some savings accessible while you repay the final loan amount. Or you could keep going with all of your savings offsetting your loan. This means that every mortgage repayment you make will just be paying down the loan's principal and you won't be paying any interest at all.

Keep in mind any amount you put in an offset account above your outstanding loan balance will earn you nothing. So you may need to find a savings account at that stage for any further savings.

Nicole Pedersen-McKinnon
Freelance finance journalist

If you're not sure what the best option is for you, consider speaking to an experienced mortgage broker.

Watch: How offset accounts work

More articles and guides on offset accounts

• How investors use offsets and interest-only loans
• Should I pay off my mortgage or leave money in my offset account?
• How to maximise your offset account with a credit card

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Frequently asked questions about offset accounts

• What are the disadvantages of an offset account?

  Account fees: Some lenders offer an offset account with a monthly or annual fee attached. Take this into consideration when looking at your loan options. There are many lenders that will offer an offset account without a fee.

  Higher interest rate: You might find that taking out a loan with an offset account adds additional basis points to your interest rate.

• Does having an offset account affect my rates?

  Some lenders will charge higher interest rates for the inclusion of an offset account. Some lenders will also charge fees to maintain an offset account, which will increase the comparison rate.

• How does an offset account work when selling your old home and buying a new one?

  It's hard to time the sale of your old home so that it lines up with the purchase of a new one. And until your home sells, you may not have a deposit to cover the new purchase. Many buyers in this situation take out a bridging loan.

  But if you have an offset account and you've been making regular payments, you may have access to enough savings to withdraw and use as a deposit on your next property.

• How does an offset account work when turning your home into an investment?

  Let's say you decide to convert your current home into an investment property while you buy a new home.
  If you have paid off most of your mortgage, that means you won't have many interest expenses to claim at tax time. You could then end up paying extra tax as the rental income you receive for your investment property will be added to your own taxable income.

  However, if you put your savings into an offset account instead of making extra repayments towards your loan, you can withdraw those savings at any time. This means you'll be paying maximum interest again, all of which is tax deductible on an investment loan. You can then use your savings to help you purchase your new owner-occupied home.

• Can you have an offset account with a variable loan?

  You can certainly get an offset account with a variable loan. In fact, the majority of loans that come with offset accounts on Finder's database are variable rate loans.

• Should I get an offset with a fixed or a variable rate loan?

  It is completely up to you and your circumstances as to whether you get a fixed or variable rate loan. You can get an offset account with either option.

• Is there a difference between offset accounts with fixed or variable rate home loans?

  There are no differences with the offset accounts themselves, although some home loans will charge a fee to have an offset account. The only real difference here would be your savings. With a fixed rate account you know the amount of interest you are saving on, but with a variable rate loan that could fluctuate – meaning your total savings and time saved on the loan could vary widely.

• What is a 100% offset?

  A 100% offset is where 100% of the money you have in your account is offset against your remaining home loan balance. That means every dollar saved is reducing the interest you're paying. This is in contrast to a partial offset, where only a portion of your offset account balance is used.

• What happens to an offset account when you refinance?

  As an offset account is directly connected to your loan, you will need to open a new offset account if you are refinancing to a new lender.