An easy way to reduce the amount of interest you pay on your home loan each month is to use an offset account
An offset account is a transaction account which reduces the interest payable on your home loan by the amount held in your account.
Home Loan with Offset Account Offer
loans.com.au Offset Variable - Up to 80% LVR (Owner Occupier P&I)
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Home Loan with Offset Account Offer
With the loans.com.au Offset Variable - Up to 80% LVR (Owner Occupier, P&I) you get a 100% offset account, a low variable interest rate, plus no application fees.
- Interest rate of 3.72% p.a.
- Comparison rate of 3.74% p.a.
- Application fee of $0
- Maximum LVR: 80%
- Minimum borrowing: $50,000
- Max borrowing: $2,000,000
Compare home loans with offset accounts
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What is an offset account?
An offset account is like a regular transaction account that has been linked to your mortgage account. You can deposit funds at any time and withdraw them again when you need to via ATMs and EFTPOS transactions. You can even pay bills from your offset account online via BPAY, or set up an automatic direct debit agreement with your creditors to have payments deducted from your account.
The primary difference is that every dollar you keep in the account actively reduces, or 'offsets' the amount of interest you pay on your mortgage.
For example, if you have a 100% offset account and have $10,000 in savings sitting in it and your mortgage balance is at $300,000, your interest charges are calculated on the balance of $290,000.
How does an offset account reduce interest?
When your mortgage is established, the bank will set it up so that interest is calculated on the outstanding balance you owe at the end of each day. The total interest charged for that month is then added together and shown as one interest figure on your statement.
Making one repayment each month means your balance is only reduced once per month. This means your interest is being calculated on a static balance level at the end of every day. You can reduce this slightly by making more frequent payments, such as switching your payment frequency to fortnightly or weekly. Both of these options will reduce your outstanding balance a little more throughout the month, which subsequently lowers the amount of interest the bank is able to charge you.
If you link an offset account to your mortgage and arrange to have your salary and any other income you receive paid into the account, you get the opportunity to reduce your mortgage balance even more frequently. This is because interest on a home loan is calculated daily, so every day you have funds in your offset account, even if you later use them, will help towards reducing the interest payable.
You can see how much money you could save with an offset account below using our calculator.
See our range of calculators here
How does an offset account affect your repayments?
If your loan is set up as a principal and interest loan, where some of your repayment amount covers interest charges and some goes towards the principal, the actual amount you pay each month won't change. You will still pay the same monthly amount to your bank.
However, the ratio of principal to interest will change, depending on how much cash you have in your offset account.
Let's work on some actual figures with an example mortgage of $300,000 at 6.5% over 30 years.
Principal and interest payments
Minimum monthly repayments on this loan would be about $1,896.20. Of that total amount you pay, $1,625 goes towards your interest charges while a measly $271.20 pays down your mortgage balance a little during your first month.
Now, if you had $10,000 sitting in an offset account your repayment would still be the same at $1,896.20 per month. The difference is that you would only pay $1,570.83 in that first month, with $325.37 coming off the mortgage balance.
The cash you had sitting in your offset account actually reduces the amount of interest you pay each month so that the amount that goes towards your mortgage balance is increased. As a result, you end up paying your mortgage off much faster, as this has a significant compounding effect over time.
Interest-only payments
If you have opted for interest-only payments on your home loan, your repayments may be affected by the amounts you have in your offset account. Remember, the amount of interest you're charged is calculated on your daily mortgage balance minus the funds in your offset account.
By leaving funds in your offset account as long as you can before paying bills and living expenses, you subsequently reduce your mortgage balance each day. This means the interest payment you make at the end of each month will be reduced. It should be noted though, that making interest-only repayments does not reduce the balance owing on your home loan and could extend the amount of time it takes to pay off your home loan.
Will I earn interest on the savings in my offset account?
You aren't paid any interest for the cash you leave sitting in your offset account. However, you are reducing the amount of interest you pay on your mortgage based on how much you have in the account.
When you think about it, the rate of interest charged on a mortgage is higher than the interest rate you'll earn on your cash sitting in a savings account, so your cash is actually working harder for you in an offset account.
Let's assume you have $10,000. If you put that into a savings account you might earn 2.5% interest on your savings. That's $250 per year in interest earnings that you have to declare to the tax office and then pay tax on.
By comparison, let's put the same $10,000 into an offset account where you're paying 4.5% on your mortgage interest. That's $450 per year in interest charges you don't have to pay, so you're saving money.
Disadvantages of an offset account
- Offset accounts are usually offered on full featured home loans and some of these loans can have higher interest rates or fees attached to them than a basic home loan.
- The offset account itself may have an account-keeping fee attached to it.
- Finally, be sure you know the difference between a partial offset account and a 100% offset account. A partial offset account differs in that it will only offset a percentage of the balance in your offset account, not the full amount.
Why not just pay extra on your mortgage?
There are benefits to keeping money in your offset account as opposed to your home loan. The first of which is that funds can be kept in your offset account and then used as you would with a debit card. This means you could have your salary deposited into your offset account and then get the benefit of lower interest charges every day you don't use your money. Also, accessing money through a redraw facility can come with minimum redraw amounts and fees, which might make an offset account more attractive than making extra repayments.
Redraw fees
If you ever need to access your extra funds in the future to pay for unforeseen expenses or unexpected bills, you may need to redraw them from your mortgage. Some banks will charge you a redraw fee that you wouldn't have to pay if you simply withdrew that cash from your offset account. There are also some banks that will limit the amount of money you can redraw with each transaction. This may mean you end up redrawing more than you really wanted to, which costs you more in interest in the long run.
Tax deductibility
Let's say you decide to put all your savings into your mortgage in an effort to pay it off quicker. You do this for a few years and then you decide you need a bigger home for your family, but you don't want to sell your existing home. Instead, you want to turn it into an investment property. So you redraw your extra payments out of your mortgage and pay them onto the mortgage for your new family home. This keeps your new mortgage lower and raises your investment loan a little.
If you redraw those extra funds you paid into the mortgage to use as a deposit on your new home, you may face some significant problems when tax time rolls around. By redrawing funds out of your original mortgage and paying them into your new mortgage, you effectively withdrew cash out of your investment for personal use. This is frowned upon by the tax department, as the old loan you now want to use as an investment needs to stay at the balance it was at when you stopped living in it. That's the tax deductible balance the ATO will work on.
Yet, if you left those extra funds sitting in an offset account and then withdrew them to pay the deposit on your new home, the original loan remains untouched. You can reduce your new family home mortgage, but you also get to leave your investment mortgage at a higher balance to maximise your tax deductibility.
Bill has a home loan of $300,000 and has worked hard to pay $50,000 in extra payments into the redraw facility. If he purchases a new home and turns the original house into an investment property, his investment loan amount for tax purposes will be $250,000. Even if he withdraws that $50,000 from his redraw facility and raises his mortgage to $300,000, the tax office will consider that he withdrew $50,000 from it for personal use – not investment use.
Maximising the savings you have in an offset account
If you're disciplined with your money, you may have an opportunity to maximise the amount of cash you leave sitting in your offset account each month. Many banks allow you to package up your banking products to receive discounts on account fees and charges.
You might have the chance to package up your mortgage with your offset account, along with a handy credit card, all under the same annual fee.
The majority of credit cards these days come with interest-free days attached. This means you can use the bank's credit to pay for your bills, living expenses and other costs at the beginning of each month. As long as you pay off the whole balance before the due date, you won't be charged interest on those purchases.
If you have your entire salary paid into your offset account each week or fortnight, you're increasing the amount of savings you have in your account. At the same time, you're reducing the amount of interest you pay on your mortgage.
When you add in the benefit of paying for all your bills and expenses on a credit card with interest-free days, you get to leave your salary sitting in the offset account for a longer period of time. When the credit card bill is due, you withdraw the funds from your offset account and pay it down to zero.
As a result, you pay even less interest on your mortgage and you pay absolutely no interest on your credit card. If you can coordinate your finances the right way, this can be an extremely powerful tool.
As mentioned, discipline is key here. It's important that you always spend less on your credit card each month than you earn. The amount of salary and other income going into your offset account needs to cover your mortgage repayments and your entire credit card bill each month, or you end up paying more interest than you really need to.
Offset accounts and fixed rate home loans
Offset accounts are commonly associated with variable rate home loans, but the competitive nature of the home loan market means this feature is available with some fixed rate home loans. These home loans can provide the stability of a fixed interest rate and reduce the amount of interest you pay at the same time. While this repayment method is suitable for borrowers who have just entered the market, such as first home buyers, using this home loan as a hedging strategy may not be as effective. Variable interest rates fluctuate according to economic conditions and unless you’re an economic expert, predicting when interest rates fall or rise is no easy task. Either way you’ll still have the benefit of the offset account to reduce your principal.
Is an offset account the best option for you?
Offset accounts are considered to be deposit products. Therefore, they are considered investment accounts. In order to determine whether an offset account is better for you or not, you should not take any information provided within this article as financial advice. Rather, you should discuss your situation with a licensed financial advisor and work out whether an offset account might be right for your own personal financial situation or not.
If I put all my pay into the off set account, do the repayments for the loan come out of the offset account?
Also probably a dumb question but if I had $50000 in offset, account and when my pay goes into the offset account it makes it $51000. Does anything over the $50000 go onto the loan or is it just the normal repayments and I keep the extra $1000 as savings?
Hi Kally,
Thanks for your questions.
Your loan repayments won’t automatically get deducted from your offset account unless you’ve made an auto-debit instruction to do so. Offset account works like a regular transaction account sans interest. You can access your money anytime, say to pay your utility bills. Not just the $1000 but whatever balance is there in the offset account.
What it does is actively reduce or ‘offset’ the amount of interest you pay on your mortgage. Say you have a loan of $150,000 and you’ve kept $50,000 in the offset account, your interest will be computed on the loan balance not covered by the offset account, that is $100,000. Kindly note that your loan payment will be the same, however, the portion that goes to principal and interest will change. You may check this page for detailed explanation on how offset account works.
I hope this helped.
Cheers,
Liezl
Hi,
I would like to know how to utilise equity in my home. Also if an offset loan is the best option?
Hi Jane,
Thanks for your question.
If you have a line of credit home loan, it acts as a flexible transactional mortgage that lets you access your home equity when you need them. You can use the funds for a renovation, to purchase a property or car, or even to cover your ‘big’ retirement plans.
We can’t say if an offset home loan is the best option for you or not as it depends entirely on your personal situation. A home loan with offset account means that your mortgage is attached to a regular transaction account. Every dollar you keep in the offset account actively reduces, or ‘offsets’ the amount of interest you pay on your mortgage. However, do note that offset accounts are usually offered on full featured home loans and some of these loans can have higher interest rates or fees attached to them than a basic home loan. Also, the offset account itself may have an account-keeping fee attached to it. Out guide above can help you decide if this type of home loan is right for you.
Cheers,
Anndy
Can I get a fixed rate interest only mortgage with an offset account and also if I go fixed and variable can the offset be used for both the fixed and variable? I have recently been advised that the offset account can only be attached to the variable percentage.
Hi Cormac,
Thanks for your question.
On our comparison table above, you can compare home loans with offset account feature. Your options include fixed and variable home loan products.
ANZ Fixed Rate Home Loan – 2 Year Fixed (Owner Occupier) is a fixed home loan with interest-only option.
If you need help in looking for the best option, you may also get in touch with a mortgage broker who can assist you.
Cheers,
Anndy
We are currently on a 2yr fixed mortgage and are only able to get a parital offset account with our bank (minus 1.5% off total). Would a sum of say $20k be more benficial in a savings account earning minimal interest or in a partial offset account? Is there a formula for simple folk like me to work this out? Thanks, John
Hi John,
That’s a great question.
You can use our savings account calculator and our mortgage offset calculator to help you decide where you should put your funds. Additionally, you can compare a range of high-interest savings accounts and learn more about how offset accounts work on this page.
All the best,
Belinda
Hi,
Can I have more than one offset account working on a home loan and does the account pay interest. Also are there fees on this account?
Thanks: Nicole
Hi Nicole,
thanks for the question.
Generally, a home loan will come with only one offset account, and it does not pay interest. Rather, it saves you interest on your home loan, and as the interest rates for home loans are almost always higher than that of savings account, this can give a larger benefit. Offset accounts can come with monthly fees, so it’s wise to take a look at the fine print for any accounts and home loans you’re interested in.
I hope this helps,
Marc.
We currently have $100k in an offset account against a mortgage of $245k on an owner occupied property. We have no investment property.
The intention is to sell this property in the next 1 to 2 years and downsize into a fully owned (and occupied) property.
The question is – should we leave the $100k in the offset or use it to reduce the $245k mortgage?
Hi Graeme,
Thanks for your enquiry.
Please note that finder.com.au is an online comparison service and we’re not in a position to offer you specific financial advice.
However, on this page you can fill out the form to speak with a mortgage broker and discuss your options.
Thanks,
Belinda
What guarantee is there that if you start with a 100% fixed offset account, which my daughter has, that it will:
1. Be honoured over the course of the (In her case)3 years but more importantly;
2. Over the 30 years of the loan?
In other words if loan conditions change with a banking product in the future will it be retrospectively applied?
Hi Rob,
thanks for the question.
As each lender has their own policy, the treatment of an offset account in relation to product changes will be dealt with according to their unique policy. I would recommend contacting your daughter’s lender to find out how the offset account would be dealt with in the event of a substantial product change. Many lenders will honour product features for existing customers in the event product changes occur, but as mentioned you’ll want to contact your lender first.
If you’re concerned about the safety of the account, as 100% offset accounts are covered by the government guarantee on savings amounts of up to $250,000 per person per institution, these accounts can be thought of as safe as a regular savings account.
I hope this helps,
Marc.
Hello Marc,
I am 4yrs. into a 5year “variable interest only offset loan” that is to roll over to P&I after 5yrs., the question is, am I able to opt. for another 5year interest only period with out being reassessed. Will they just roll it over.
As an offset loan (int.only),I have paid off approx. 30% Of the original loan value. If I am able to pull another 5yrs. Int. only I will end up owing 15-25% of the original loan balance.
I will then go to P&I. and the result will be $Huge – $0 in 13 – 15yrs.
David
Hi David,
Thanks for your question.
It depends on the terms and conditions of the loan you’ve entered to. In most cases, lenders provide interest-only repayments for a period of up 10 years.
Please speak to your lender directly to see if they can extend your interest-only term.
Cheers,
Shirley