An offset account is usually a transactional account, which is linked to your home loan. The balance held in this account “offsets” the balance in the mortgage, helping to reduce the interest paid and overall term of the loan.
Many lenders offer a 100% offset account as a feature with standard variable home loans. Regular repayments are made to the loan as required, and a separate transaction account is set up with the same financial institution.
You can deposit your income into this transaction account and uses it for day-to-day expenses. Any money in this account is offset against the amount owing on the home loan, and interest payable on the mortgage is then calculated on the loan balance less funds held in the offset account, reducing the amount of interest paid on your loan.
How does an offset account work?
Here’s an example: if your home loan is $400,000 and you have $50,000 in your offset account, you will only pay interest on $350,000, instead of $400,000.
Keep in mind there may be higher monthly fees attached to the account and a minimum balance may be required in the account.
What are the key benefits of an offset account?
Flexible and accessible
A typical offset account is essentially an everyday transactional account, so it’s very easy to deposit and withdraw your funds, especially when compared to a line of credit or redraw facility.
High interest ‘return’ on your savings
Interest rates charged on home loans are usually higher than interest rates paid on everyday transactional accounts. So while you don’t receive interest on your savings in the offset account, the interest that you save on your home loan will typically outweigh potential interest gains.
Interest calculated daily
Interest is calculated daily, so whether you save regularly or live paycheck to paycheck, as soon as there are some savings in your offset account for more than one day at any point in time, you will benefit from the offset effect on your home loan.