The faster you pay off your mortgage debt, the better off you'll be financially. But you may be in an even better position if you put extra mortgage repayments into your offset account instead of straight into your mortgage.
Because here's the thing about owning property: Your home might be worth a lot, but it's hard to turn bricks and mortar into cash when you need it. The money in your offset account opens up far more financial possibilities than repaying the loan and having no cash left.
Using an offset when your loan is almost paid off
Let's say you have a mortgage and you still owe $400,000 on the loan. But you've saved $370,000 in your offset account. Effectively, you've been making extra repayments on the loan. This means you only have $30,000 left to repay. You have 2 options now:
- Pay off your mortgage. Keep adding to your offset account until you reach $400,000, and then pay off the loan. You're now out of debt. But you have $0 left in the offset account. If this is the bulk of your savings, you now have none.
- Keep the loan open. Keep adding to your offset account, but don't close out the loan. You could add a little bit of money to the offset account each month. Your debt is small and you're not getting charged much interest. And you have a lot of money you can easily access in the offset. However, you're still making a full monthly mortgage repayment (the majority of which goes towards the loan principal, not interest).
Effectively, leaving money in the offset account is the same as paying it off. Your interest charges are small because you're only paying interest on $30,000 worth of loan principal.
Money in an offset account is yours, extra repayments are not
This is the key thing to understand. Money in an offset account is cash you can spend. But once it's gone to pay off the loan, it's gone. And once you pay the loan off and discharge the mortgage, the lender takes the money from your offset to cover your loan debt.
If you have plenty of savings in another bank account, it makes sense that you'd want to pay off your debt. You don't have, but it makes sense. But if you have no other savings, that offset account gives you more financial options than paying the loan off and having no money.
Even if you only have a small amount of cash, an offset account is a good move
Even if you only have $10,000 to put into an offset account, this works better than making extra repayments. You could still use that $10,000 in your offset account in an emergency. It's true that lenders often let you take extra repayments back out of the loan if you need to access some cash. This is called a redraw facility.
But there are often fees attached, or restrictions on how much you can access. Whereas money in an offset account is all yours.
Learn more about offset versus redraw
Keeping money in your offset account vs paying off the mortgage
- Flexibility. If your remaining mortgage debt is small then it's not costing you much to keep it, and you can use the money in the offset account for emergencies, investments or other expenses.
- Interest. Withdrawing money from your offset account means you pay more interest.
| - No debt. You're out of debt and you own your own home.
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- Emergency fund. If something goes wrong you can easily take money out of your offset account and access it, fast. If you have a separate account with money in it for emergencies, this is less of an issue.
| - No rainy day fund. As soon as you pay off your mortgage, all the money in your offset account is gone. Congratulations, you own your own home. But it's hard to take money out of your house.
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- Ongoing repayments. Even though you're not paying any interest (if your offset amount is the same as your loan amount), you'll still need to make your mortgage repayment each month. You'll keep doing this until the full loan principal amount is repaid.
- Ongoing fees. If your mortgage has ongoing fees you'll keep paying them as long as you keep the mortgage. This cost could be minimal, but it's something you need to consider.
| - No fees. No mortgage means no fees. Easy.
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- Buying another property. If you decide to move or buy a second property you can use the funds from your offset account to cover the deposit.
- Investing opportunities. You could buy a second property and live in it while turning your current home into an investment. This allows you to shift money to the mortgage on your new home and keep paying off the investment (this is advantageous because you can deduct interest expenses on an investment property from your tax).
| - Buying another property. It can be harder to sell your property then buy a new one. If it doesn't work out you might need a bridging loan or a line of credit to cover your deposit. This means extra work and potentially extra costs.
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- It can get complicated. Having a mortgage is just one more thing to worry about, and this strategy does require you to pay more attention to your finances.
| - It's easy. If you just want to get out of debt then you might want to repay the mortgage and never hear the word "mortgage" again.
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The above information might not apply to you, of course. Your loan might not have an offset account, in which case you've just been paying your loan off. And you might have extra savings set aside, meaning having the flexibility of the offset account is less important to you.
Also, you might be the kind of person who just wants to close their mortgage and move on with their life.
Consider chatting to a financial planner or a mortgage broker to get advice tailored to your personal situation and needs.
Max keeps his home loan going and makes the most of his offset
In this hypothetical scenario, Max has $250,000 left to repay on his mortgage. He also has $250,000 saved in a 100% offset account.
But thanks to the balance in the offset account cancelling out his outstanding debt, Max doesn't have to pay any interest on the loan amount. So rather than paying off the loan in full, he could keep making his regular loan repayments and still have access to the $250,000.
He decides to put the money he is saving on interest repayments into a high-interest savings account to further boost his savings balance. Later on, when Max's car breaks down he pulls $10,000 out of the offset account to buy a new car. His offset dips down to $240,000, meaning he has to pay interest on the $10,000 as he pays it back. This is still much cheaper than getting a car loan, not to mention much easier and less stressful.
What if there's more money in your offset account than your loan?
It's possible to put more money in your offset account than the loan itself. But there's not much point. Doing this doesn't automatically close your loan account. You'd still need to discharge the loan.
But once you've saved more than the loan itself, you're not getting any benefit from offsetting interest. And your lender won't start giving you interest on top, like a normal savings account.
So you're better off keeping your offset balance just below your loan amount. Then you can use extra cash to start building up your savings separately, in something like a high interest savings account or a term deposit.
More helpful mortgage guides
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In this hypothetical scenario, Max has $250,000 left to repay on his mortgage. He also has $250,000 saved in a 100% offset account.
Also consider that offset accounts are guaranteed against bank failure only up to $250,000 – so presumably any money in the offset account above that amount might be lost if your bank goes under. This would seem to be a point in favour of paying off the loan rather than leaving money sitting in an offset account.
This is true, although in most cases a lender going bankrupt will get bought by another institution. I don’t think there’s a case in modern Australia where a lender has gone bankrupt and borrowers with offset accounts have lost out.
But it’s worth keeping in mind all the same.
I have a fixed home loan due to expire in August. I owe $250k but have $120k in offset. I don’t understand why i have only paid 10k off the total amount owing (in the past 12 months). I pay the minimum monthly payment. Should i change to weekly or fortnightly repayments?
Hi Wendy,
We’re unable to provide personal advice, so it’s best to contact your bank directly about your situation.
However we can share that your mortgage repayment is comprised of two parts: one part is the principal (repaying the overall debt) and the other part is interest.
In 12 months, you’ve repaid $10k worth of principal and the rest of your repayments were going towards interest.
Generally, offset accounts are not available to offset the interest in a fixed rate mortgage, so it would be worth checking with your bank to double check you’re getting the benefit here. If you’re not (or even if you are!) you might be able to get a better return on your money by placing it in a high interest savings account.
Hope this helps!
My offset equals my loan, but as interest rates have increased so have my minimum monthly repayments. If the life of the loan hasn’t changed and I’m apparently no longer accruing interest on the loan amount then why would the minimum monthly repayments are increase?
When I asked my bank this question they could not (would not) give me an answer I could understand.
Hi Nico,
We understand how confusing repayments can be but as a comparison site, we’re unable to comment on how your lender works out its repayments. It would still be best to discuss it with them. If their explanation is confusing, don’t hesitate to ask questions or clarification as they’d be happy to break it down for you. You could also talk to a mortgage broker who would be able to work through your situation to see if it’s still the best loan option for you.
All the best,
Rebecca
I have a home loan of $400,000 an offset of $400,000 with redraw amount of $200,000. Will it be beneficial for me to transfer $200,000 from the offset account to home loan account and use the balance $200,000 in the offset account for other investments?
Hi Raj!
Splitting your money from the offset account so that some of it goes to an investment is never discouraged, as long as you know it might give more money in the long-run. :)
You can consult a list of financial advisers to help you decide on this matter based on your situation.
Hope this helps.
Cheers,
Jonathan