how-does-your-accountant-use-offset-accounts

Why you need to consider using an offset account

Rates and fees last updated on

An offset account can allow you to save thousands and shave years from your mortgage. Find out how shrewd Australians use them.

Attaching an offset account to your home loan is the accountant-inspired feature to make a portion of your interest payments disappear. If you want to pay off your mortgage sooner, a home loan with an offset facility can be a considerable option to reduce the interest payable against your outstanding loan balance and reducing down your overall debt levels. Learn more about how offset accounts work and when appropriate, compare home loans with 100% offset accounts.

How does an offset account work?

An offset account is a transaction account attached to a home loan. The balance of a 100% offset account is taken away from the principal remaining on the loan for interest calculation.

Here is a breakdown of how a 100% offset account works:

how-does-a-100-offset-work2

In this hypothetical situation, interest is applied to $130,000 instead of the full $150,000 owed. As savings grow, the amount saved on interest also grows. Effectively, this reduces the amount of interest charged over the life of the loan.

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'.

How to use an offset account as a buffer

An offset account can be used to build a buffer of repayments and help pay a loan off even earlier.

Borrowers who do this will take out a regular 30 year loan and then pay it off like a 20 or 25 year loan.

To do this, a borrower would pay the the minimum repayments as usual, and then pay any extra amounts into the offset account. This gives them access to the funds in the event that they need the money, and gives them the extra wiggle room of lower repayments in the event that they have income issues or rates rise and they must stop making extra payments.

To find out what repayments would be on a 20 or 25 year loan, use our loan repayment calculator.

Is an offset account available through a trust?

Yes, some lenders do offer offset accounts on trust home loans. The policies surrounding this will differ depending on the lender, so be sure to raise this with your lender or broker first.

What is an offset account?

Video interview with Carla Baldock, Neil Manuel & Heidi Armstrong

Carla Baldock: An offset account is an account that is linked to your mortgage, and the balance of that offset account directly reduces the balance of your mortgage, therefore reducing the interest that you pay on your home loan.

Neil Manuel: What an offset account is, is a savings account that is taken up when you take out your home loan, and the savings account allows you to put your wages in it, any salary, any extra money that you get into the savings account. You don't actually need to apply that money into the actual home loan. Just by it being in your savings account, the offset savings account, it actually allows the interest that gets charged on the actual home loan to be reduced based on how much money you have held in that savings account.

Heidi Armstrong: An offset account really works as a separate account that sits alongside the loan account. A really important distinction is it doesn't form part of the loan account. And so what's so important about it? Well, the first thing is it's great. It works very much like a transactional account where you can pay your salary into the offset account, and you can pay your bills from the offset account. But the real benefit is that any money that you have in that offset account, not only is it working to reduce the interest that you would otherwise pay on your loan, but what it does is it doesn't reduce the overall balance of the loan. And that's important if you're particularly structuring your loan in a way to maximise tax effectiveness.

Why should I consider an offset account?

An offset account may save you interest and cut the length of a home loan. It will work best for people who can maintain a decent balance in their offset account and contribute further to it over time. It is worth shopping around, as offset accounts can differ in inclusions and fees.

Will a home loan with an offset account cost me more than a standard home loan?

Traditionally, home loans with offset accounts would either attract a higher interest rate or higher fees and sometimes both. However, with the emergence of smaller online lenders, many loans are feature-packed with market leading rates. Major lenders still tend to charge a premium for offset accounts, so it is worth shopping around.

Are there different types of offset accounts?

Yes, there are 100% offset accounts and partial offset accounts:

  • 100% offset accounts are the most common form. As explained in the above table, the balance of the offset account is deducted from the outstanding principal before interest is calculated. The balance of this offset account doesn't earn interest.
  • Partial offset accounts can be explained as an online savings account where the interest which would be generated by the balance pays off the principal of the loan, without the borrower having to pay tax on the interest. A 100% offset account can be a far more effective tool for reducing the interest paid on a loan.

Compare more 100% and partial offset accounts here

How much interest can I save by using an offset account?

Below is a hypothetical loan scenario comparing the same loan without and with a 100% offset account.

comparing-offset-without-offset2

From this example, taking the loan with an offset account saves a whopping $136,000 over the life of the loan. It also reduces the term of the loan from 25 years to 19 years and 8 months. Owning a home outright, debt free, is a goal that is well worth fast-tracking. Especially as first time buyers are waiting longer to plunge into the property market.

Should I use an offset account or invest in an online savings account?

The choice will depend on you. Generally speaking online savings accounts earn less in interest than lenders charge in interest for home loans. And, with a savings account, tax will be paid on the interest earned.

What fees do I need to be aware of?

Some offset accounts charge fees on standard transactions. It is well worth putting the research in as to whether the home loan you're applying for has a dud transaction account.

Compare variable rate 100% offset account home loans

Offset accounts could potentially save you thousands in mortgage repayments over the life of your home loan.

Rates last updated July 21st, 2017
$
Loan purpose
Offset account
Loan type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.84%
4.22%
$0
$395 p.a.
95%
Apply for a new owner occupier loan or refinance from another lender and receive this discounted rate.
3.69%
3.72%
$0
$0 p.a.
80%
A low rate home loan with no ongoing fees.
3.72%
3.74%
$0
$0 p.a.
80%
Take advantage of a 100% offset account along with no annual or application fees.
3.54%
3.54%
$440
$0 p.a.
80%
Borrow up to 80% LVR with no ongoing fees and a 100% offset account.
3.79%
4.11%
$0
$299 p.a.
80%
A fully featured home loan with an offset account and discounts available. $1000 cashback offer available for loans over $300k. Terms and conditions apply.
3.73%
3.88%
$0
$10 monthly ($120 p.a.)
80%
A low interest rate home loan that lets you borrow up to 80% of the property's value.
3.83%
3.83%
$0
$0 p.a.
70%
A special low variable rate for owner occupiers with 100% offset account and no application or ongoing fees.
4.34%
4.74%
$0
$395 p.a.
95%
Enjoy discounted rates to a range of NAB products. 350K NAB Rewards Points offer available. Terms and conditions apply.
4.19%
4.19%
$0
$0 p.a.
90%
Get access to a redraw facility and offset account without the annual fee.
3.79%
4.46%
$0
$375 p.a.
85%
Discount off an already competitive 2 year fixed rate for loans over $150k. NSW,QLD and ACT residents only.
4.04%
4.06%
$0
$0 p.a.
90%
A home loan with no ongoing fees. This loan is available for refinances and purchases.
3.69%
4.08%
$0
$395 p.a.
90%
A high maximum LVR home loan with redraw facility and additional payments.
4.39%
4.78%
$0
$395 p.a.
95%
Package your home loan to get discounts on your interest rate and other financial products.
3.99%
4.99%
$0
$395 p.a.
95%
A package home loan with fee free extra repayments available during the fixed term.
4.40%
4.80%
$0
$395 p.a.
80%
A discounted variable loan package for under $500 000 home loans.
3.99%
4.98%
$0
$395 p.a.
95%
A discounted package rate for owner occupiers with the ability to package a Qantas rewards earning Amplify credit card. $1,500 cashback available for refinancers. Conditions apply.
3.79%
3.92%
$0
$10 monthly ($120 p.a.)
80%
Earn Velocity points on a competitive variable rate home loan with flexible features.

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As outlined in our example scenario, harnessing an offset account like your accountant does could save you $136,000 in interest and earn you 5 years and four months of debt-free home ownership.

Marc Terrano

A passionate publisher who loves to tell a story. Learning and teaching personal finance is his main lot at finder.com.au. Talk to him to find out more about home loans.

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24 Responses

  1. Default Gravatar
    DiApril 28, 2017

    What happens if you have more money into your offset account than you have owing on your mortgage?

    Is there an upper limit to the amount of money you can have in an offset account?

    • Staff
      LiezlApril 28, 2017Staff

      Hi Di,

      Thank you for your question.

      If your offset account balance is bigger than your outstanding mortgage, your loan payments will be applied fully to the principal. This is because your mortgage will not accrue interest at this point. Kindly note that the balance of this offset account doesn’t earn interest.

      As for the balance limit, it would be best to check this with the bank or lender as they might have set a maximum limit.

      I hope this has helped.

      Best regards,
      Liezl

  2. Default Gravatar
    January 9, 2017

    If you are on interest only loan and have 100% offset attached. how the repayments would be affected. As an example you have a loan of $400,000 for years @ 4% with repayment of 1333.33. if you have another 20,000. How the repayments would work. From the above example, repayments don`t change, then how the 20K offset balance help?

    • Staff
      MayJanuary 12, 2017Staff

      Hi Raj,

      Thank you for your question and for contacting finder.com.au we are a financial comparison website and general information service we are not mortgage specialists so can only offer general advice.

      Usually, with the interest-only offset, the balance in your offset savings account is offset against the amount owing on your home loan. For instance, you owed $400,000 on your mortgage and at the same time you had a $20,000 balance in your linked offset savings account, you would only be required to pay interest on an amount of $380,000.

      You can find more information on this interest-only offset account home loan on this page.

      Hope this has answered your question.

      Cheers,
      May

  3. Default Gravatar
    SteveJuly 14, 2015

    How does a visa card off set account work.

    • Staff
      JodieJuly 14, 2015Staff

      Hi Steve,

      Thank you for your comment on finder.com.au, a financial comparison website.

      The Visa debit-card is simply the type of card you may be able to attach to your offset account to allow you access to the funds you have put in there if you need it, it would still function as your typical offset account in terms of any funds you have deposited in this account working to help save you interest on your home loan.

      Regards
      Jodie

  4. Default Gravatar
    ChrisJune 23, 2015

    Hi,
    Whats the difference between leaving money in an Offset Account and just paying off the loan with that money?
    I appreciate the Offset money is readily available and can be used like a transaction account, but is there a difference in interest saved or time saved in paying off the loan?

    • Staff
      BelindaJune 24, 2015Staff

      Hi Chris,

      Thanks for your enquiry.

      An offset account reduces the overall interest payable against your outstanding loan balance as it effectively ‘offsets’ the amount of interest you pay on your mortgage.

      For instance, if you have a 100% offset account and have $10 000 in savings in the account and your mortgage balance is $300 000, your interest charges will be calculated on the balance of $290 000.

      There are many benefits to keeping funds in your offset account rather than your home loan, such as the fact that accessing money through a redraw can come with minimum redraw amounts and fees which could make an offset more attractive than making additional repayments on your mortgage.

      On this page, you can use our home loan offset calculator to estimate how much an offset account could reduce your interest payable and how it reduce the time taken to repay your loan.

      Thanks,
      Belinda

  5. Default Gravatar
    GaryFebruary 13, 2015

    Hello,
    I would like to know who can check my bank loan interest

    • Staff
      MarcFebruary 16, 2015Staff

      Hi Gary,
      thanks for the question.

      You can check how much interest you’re paying on your home loan by looking at your most recent bank statement. Alternatively, you can also call your lender to see what your current rate is.

      I hope this helps,
      Marc.

  6. Default Gravatar
    Irons78December 2, 2014

    Hi

    My PPOR has now turned into an IP ? I have a fixed loan of approx $170k and a variable loan (VL) of approx $135K. I currently have approx $70k in savings. I also have an offset a/c to use if necessary.

    I’m unsure whether to continue using my existing savings in the offset a/c (currently 4.85%) and pay off the loan (I currently have the capacity to pay $3k per month in addition to my mortgage repayments) but I believe as a result of this method, it will reduce the loan interest and each year my income tax will potentially increase. I believe my other option is to use my existing savings and put them in a high interest savings acct (currently 4.02%) and deposit my additional monthly savings there, thereby the loan interest remains as high as possible for a better tax deduction and I will also pay minimal income tax on the savings earned.

  7. Default Gravatar
    RobynSeptember 15, 2013

    Can withdrawals be made from an offset mortgage account or is it locked in for a period of time or notice needs to be given etc.?

    thanks

    • Staff
      MarcSeptember 16, 2013Staff

      Hello Robyn,
      thanks for the question!

      Most offset accounts function like a transaction account, meaning you get a linked debit card which you can use to make withdrawals or payments at any time.

      I hope this helps,
      Marc.

  8. Default Gravatar
    July 30, 2013

    I don’t have an offset account for my loan, but all money I have sitting on the loan. Are those available funds are doing a same job in offsetting the interest on the loan or there is a difference?
    What is better?
    Thanks

    • Staff
      ShirleyJuly 31, 2013Staff

      Hi Miro,

      Thanks for your comment.

      Since you don’t have an offset account with your home loan the money in your loan won’t be offsetting the interest on the loan.

      To determine whether an offset account is right for you, please see this page.

      Hope this helps,
      Shirley

  9. Default Gravatar
    IwanJuly 24, 2013

    Hi. We have two offset accounts. One with our home and the other with my Investment property. Just wondering can I have two offset accounts for each property or can I have only one an offset account link to my home and IP. Cheers

    • Staff
      JacobJuly 24, 2013Staff

      Hi Iwan. Thanks for your question. You can only have one offset account linked to each mortgage. So if you have a mortgage for your principle place of residence, you can have an offset account linked to that loan. And if you were to get another loan for your investment property, you can have an offset account linked to that mortgage too. I hope this helps. Jacob.

  10. Default Gravatar
    CarrollJuly 15, 2013

    Hi Adrian,
    are there any mortgage lenders out the that allow
    multiple offset accounts on a home loan?

    • Staff
      ShirleyJuly 15, 2013Staff

      Hi Carroll,

      Thanks for your comment.

      To our knowledge, it is standard for home loans to have one offset account linked to it.

      Cheers,
      Shirley

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