Offset Accounts Explained: How They Work and Why They Matter
Understand how offset accounts work, calculate potential interest savings, and determine if they're worthwhile for you.
Offset accounts are one of the most valuable features available with variable rate home loans, potentially saving tens of thousands in interest over your loan term. Despite their benefits, many borrowers don't fully understand how they work or maximize their potential. This guide explains offset accounts and strategies to maximize savings.
What is an Offset Account?
An offset account is a transaction account linked to your home loan. The balance in your offset account reduces the loan balance used to calculate daily interest charges. If you have a $400,000 loan and $50,000 in your offset account, you only pay interest on $350,000. Your actual loan balance remains $400,000—the offset simply reduces interest charges.
Full Offset vs Partial Offset
Full offset accounts reduce your loan balance dollar-for-dollar for interest calculation purposes. Most major banks offer 100% offset. Partial offset accounts only offset a percentage of your savings (e.g., 60% offset means a $10,000 balance reduces interest calculations by $6,000). Always choose 100% offset unless partial offset products offer significant rate discounts.
How Much Can You Save?
The savings depend on your offset balance and loan rate. At 6.5% interest, every $10,000 in your offset saves $650 annually. A $50,000 balance saves $3,250 per year—$32,500 over 10 years. Because these savings reduce your loan principal faster, your actual savings compound. Using an offset account effectively can reduce a 30-year loan to 20-22 years.
Offset vs Extra Repayments
Both offset balances and extra repayments reduce interest, but offset accounts provide flexibility. Extra repayments lock money into your loan (some redraw facilities have limits or delays). Offset balances remain accessible instantly for emergencies or opportunities. If interest rates or your circumstances change, you maintain complete liquidity and control.
Maximizing Your Offset Account
Deposit all income directly into your offset account. Pay all bills and expenses from the offset account, not a separate account—this maximizes the average daily balance. If you have irregular income or bonuses, keep them in the offset. Use credit cards for purchases (paid in full monthly) to keep money in offset longer between paychecks. Every day at higher balance = more interest saved.
Offset Accounts for Investors
Investment property loans with offset accounts provide tax advantages. Unlike saving in a regular savings account (where interest earned is taxable income), offset account savings aren't income—they simply reduce your loan interest expense (which is tax deductible). This makes offsets particularly valuable for investment loans at higher tax brackets.
Are the Fees Worth It?
Some loans charge $10-$15 monthly for offset account access ($120-$180 annually). Calculate whether your offset balance justifies the fee. At 6.5% interest, you need approximately $2,000 average balance to offset a $10 monthly fee. Most borrowers save far more than the fee cost. However, if you can't maintain meaningful balances, fee-free loans without offset might be better.
Key Takeaways
Offset accounts are one of the best loan features for reducing interest and maintaining financial flexibility. They're especially valuable if you have irregular income, plan to make extra repayments, or want emergency funds accessible. To maximize savings, direct all income to your offset and pay expenses from it. A mortgage broker can help you find loans with 100% offset accounts at competitive rates.
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