What is an offset account and how do I use it?

An offset account is a transaction account that may help reduce the interest you pay over the life of your home loan depending on how you use it, but not all home loans come with offset accounts and others may charge additional fees to include one.

Here we explain what is an offset account and what to consider if you’re thinking this is an important feature when comparing home loans.

An offset account is an account linked to your home loan. It can be used like an everyday transaction account for depositing money and making purchases. Your lender will look at the balance of this account to ‘offset’ your home loan account balance, meaning you pay interest on your home loan balance, minus the amount in your offset account.

Offset accounts can reduce your interest repayments because your lender will charge you interest on your remaining home loan value, minus the amount in your offset account.

For example, if you have a balance of $300,000 remaining on your home loan, and $50,000 in an offset account linked to the loan, you would be charged interest on $250,000.

Offset accounts can also be used as an everyday transaction account, with a BSB and account number. This gives you the ability to have your salary or income deposited into it, and make payments with your card or smartphone from the account.

Offset accounts are usually more common in variable home loans than fixed-rate home loans, so if this is important to you be sure to chat with your lender about which home loans offer offset features.

Using an offset account may help you save money by reducing the interest you pay on your home loan.

Maintaining sufficient funds in your offset account can also reduce the length of the loan term. Reducing the length of your home loan may save you money on interest over the life of the loan. When you have money in an offset account, your monthly repayments are likely to be the same as if you didn’t. This could allow you to pay off the loan faster as the offset account reduces the interest because more is going towards paying off the principal.

Some offset accounts may not be 100 per cent offset. This means you only offset your mortgage by a portion of the balance in your account. Partial offset accounts mean you save less on interest.

The way an offset account benefits the borrower is by adding as much money as possible to the account — the more money in your offset account, the more interest you will typically save on your mortgage.

As an example, some borrowers may have their salary or income paid directly into their offset account. The offset account can then be used as an everyday transaction account as an added benefit.

Banks and lenders will offset your home loan daily. This means the longer you keep your money in your offset account, the more you can typically save on interest.

Another example used by some borrowers is to use a credit card to pay for everyday expenses, to not dip into the offset account for day-to-day expenses. This strategy only works if you are diligent with your credit card repayments. If you don’t repay your credit card each month you could be hit with hefty fees and higher interest charges that would only increase your overall debt.

While these examples may work for some, they might not be suitable for you. It’s always a good idea to do your own research or talk to a financial professional to discuss what options may suit your circumstances.

A redraw facility is a different home loan feature. It allows you to make extra repayments on your home loan in addition to your minimum weekly, fortnightly or monthly repayment. This surplus can then be taken out or redrawn if you need it.

A redraw facility may help you pay off your home loan faster because it could help to pay off extra chunks of the principal amount borrowed.

Money in an offset account is usually accessible, while redraw facilities may require additional processes to withdraw or use the money. You can usually only “redraw” from extra repayments you have made to your home loan, and you’re less likely to be able to use redraw for everyday type transactions.

It’s important to chat with your lender about these options, as depending on the lender they may come with fees or withdrawal limits.

Offset percentage

When applying for a home loan with an offset account, check if the offset account is 100 per cent. This means you reduce your interest based off the total amount in your offset account, rather than a portion of it.

Minimum and maximum limits

Different home loan products may require minimum or maximum offset limits for your account. Be sure to check these with your lender. For example, a minimum offset limit would mean if you have less than the minimum, you are not offsetting any of your home loan interest. Likewise a maximum may cap your saving capabilities.

Fees

Home loan products with additional features, such as an offset account, could come with additional fees attached. Depending on the lender, this may include fees like monthly or yearly servicing fees, or fees for depositing or withdrawing from certain accounts.

Spending

If you are planning on using your offset account for everyday transactions, check your lender’s offset account allows you to set up the account with debit or eftpos capabilities.

Interest rate

Having home loan features that help you pay off your loan faster, or with less interest, can save you thousands over the life of the loan. However, these features should be considered alongside the interest rate and other fees. A handy tool is the comparison rate, which combines the interest rate with other common fees into a single percentage to help you compare more easily.

Finding a product with a competitive home loan interest rate can save you thousands, so negotiating your interest rate could be a good place to start. Be sure to consider the rate alongside features like offset and redraw facilities and any other fees and charges.