What is an Offset Account?
An offset account is one of the most valuable home loan features you can add to your owner occupied home loan or investment property. Think of it as a regular transaction account that's linked to your home loan, but with a powerful advantage - every dollar sitting in this account works to reduce the interest you pay on your loan amount.
Here's how it works: if you have a home loan of $500,000 and $20,000 in your linked offset account, you'll only pay interest on $480,000. The money in your offset account remains fully accessible for your daily banking needs, giving you both flexibility and genuine home loan benefits.
How Does a Mortgage Offset Actually Save You Money?
The savings from an offset account can be substantial, particularly when you're dealing with current home loan rates. Let's look at a practical example to understand the real impact on your finances.
Imagine you have a variable rate home loan of $400,000 with a variable interest rate of 6.5% per annum. You maintain an average balance of $25,000 in your offset account throughout the year. That $25,000 effectively reduces your loan balance to $375,000 for interest calculation purposes.
Over the course of a year, this could save you approximately $1,625 in interest charges - money that would otherwise go straight to your lender. Multiply that over the life of your loan, and you're looking at tens of thousands of dollars in savings, plus you'll build equity faster and potentially shave years off your loan term.
The Different Types of Offset Accounts
When you compare rates and home loan packages, you'll encounter two main types of offset arrangements:
Full Offset (100% Offset)
- Every dollar in your account offsets your loan balance completely
- Most common in variable home loan rates products
- Provides maximum interest savings
- Typically available with owner occupied home loan options
Partial Offset
- Only a percentage of your account balance offsets the loan
- Less common in the Australian market
- Usually offers 40-60% offset benefit
- May come with lower account fees
When you apply for a home loan, it's worth asking your broker at Mortgage Path which home loan products offer full offset functionality, as this delivers the most significant financial benefit.
Offset Accounts vs Redraw Facilities
Many people confuse offset accounts with redraw facilities, but they're quite different home loan features. Understanding the distinction helps when you access home loan options from banks and lenders across Australia.
A redraw facility allows you to make extra repayments on your loan and then withdraw those funds later if needed. While this sounds similar, there are important differences:
- Access: Offset funds are instantly accessible via card or online banking, while redraw may take several days and could have restrictions
- Tax implications: For investment loans, offset accounts offer potential tax advantages that redraw doesn't
- Security: Lenders can sometimes limit or remove redraw access, but offset accounts remain your money
- Minimum amounts: Redraw often requires minimum withdrawal amounts, offset accounts don't
Who Benefits Most from an Offset Account?
Offset accounts aren't just for high-income earners. They're particularly valuable if you:
- Regularly save money: If you maintain a healthy balance between pay cycles, those funds can offset your loan
- Receive irregular income: Freelancers, business owners, or commission-based workers can park larger payments in offset
- Are saving for something specific: Planning a renovation or holiday? Keep those savings in offset until you need them
- Have variable income streams: Rental income, bonuses, or investment returns can all sit in offset
- Want to invest in property: Building your offset balance can improve borrowing capacity for future purchases
Variable Rate, Fixed Rate, or Split Rate with Offset?
One important consideration when reviewing home loan options is that offset accounts are typically only available with variable interest rate products. If you're considering a fixed interest rate home loan, you'll generally lose access to offset functionality during the fixed period.
This is where a split loan strategy can work well. You might split your loan:
- 50% on a fixed rate for repayment certainty
- 50% on a variable rate with an offset account for flexibility and savings
This approach lets you enjoy the financial stability of fixed interest rate home loans while still benefiting from offset savings on the variable portion. When your fixed rate expiry approaches, you can reassess this split based on your circumstances and the interest rate environment.
Understanding the Costs
While offset accounts provide substantial home loan benefits, some lenders charge monthly account fees or offer them only with premium home loan packages that have higher interest rates. When calculating home loan repayments and comparing options, consider:
- Monthly account fees (typically $10-$20)
- Package fees for home loan products that include offset
- Whether the interest rate discount on a package offsets these costs
- Your typical account balance and potential savings
A mortgage broker can help you compare rates and determine whether the savings from an offset account outweigh any additional costs based on your financial situation.
Offset Accounts and First Home Loan Applications
If you're looking at your first home loan, you might wonder whether an offset account is worth considering. Even with a smaller loan amount and tighter budget, an offset can help you:
- Reduce your need for lower repayments over time by paying off the loan faster
- Build savings discipline while reducing interest
- Potentially avoid Lenders Mortgage Insurance (LMI) sooner by improving your loan to value ratio (LVR) faster
- Create a buffer for unexpected expenses
Many first home buyers focus solely on securing the lowest rates, but the right home loan features can deliver more value than a slightly lower interest rate.
Making Your Offset Work Harder
To maximise your offset account benefits:
- Deposit your salary directly into the offset account
- Use a credit card with interest-free days for purchases, then pay it off from offset (keeping money offset longer)
- Direct all savings into this account rather than separate savings accounts
- Consider having rent from investment properties paid into offset (speak with a tax adviser about your specific situation)
- Keep only the minimum in other accounts
The longer your money sits in the offset account, the more you'll build equity and progress toward achieving financial stability.
Should You Refinance to Get an Offset Account?
If your current home loan doesn't include an offset account, refinancing might be worth considering. This is particularly true if:
- You maintain significant savings in separate accounts
- Your current interest rate is above current home loan rates
- You're moving from interest only to principal and interest repayments
- Your loan to value ratio (LVR) has improved since you first applied
A loan health check can help you understand whether refinancing to access offset functionality makes financial sense for your situation.
Portable Loans and Offset Accounts
If you're planning to upgrade or relocate, check whether your home loan includes portable loan features. A portable loan allows you to transfer your existing loan to a new property, maintaining your current interest rate, home loan features, and offset account arrangements. This can save you time and money on the home loan application process when you're ready to make your next move.
An offset account is more than just another home loan feature - it's a practical tool that can help you secure your future, reduce what you pay in interest, and achieve your property goals sooner. Whether you're considering your first home loan or reviewing your current arrangements, understanding how offset accounts work puts you in a stronger position to make informed decisions about your home ownership journey.
The team at Mortgage Path can help you access home loan options from banks and lenders across Australia, compare rates, and find home loan packages that align with your financial goals. We'll work with you to understand your situation and identify which home loan products deliver the most value for your circumstances.
Call one of our team or book an appointment at a time that works for you to discuss how an offset account could benefit your home loan strategy.
