How Does an Offset Account Work?
An offset account is a transaction account linked to an eligible home loan. The money you keep in the account can reduce the balance used to calculate interest on your loan.
It can give you a way to keep your savings accessible while potentially reducing the interest you pay over time.
Your Savings Can Sit Beside Your Home Loan
An offset account does not normally reduce your actual loan balance. Instead, the balance held in the offset can reduce the amount of your loan used to calculate interest.
Your Home Loan
You have an eligible home loan with an outstanding balance, such as $500,000.
Your Offset Balance
You keep money in your linked offset account while still having access to those funds.
Interest Is Calculated
With a full offset, the offset balance can reduce the portion of the loan on which interest is calculated.
What Is an Offset Account?
An offset account is generally a bank account linked to an eligible home loan. It operates much like a normal transaction account, allowing you to deposit money, receive your income and make payments, depending on the product.
The key difference is that its balance may be taken into account when calculating the interest charged on your linked home loan.
A $50,000 Offset Can Make a Difference
For example, if you have a $500,000 eligible home loan and $50,000 in a full offset account, the lender may calculate interest on $450,000 rather than the full $500,000, subject to the loan terms.
How Does an Offset Account Reduce Interest?
Interest on a home loan is generally calculated based on the outstanding loan balance. With a full offset account, the balance in the offset can be subtracted from the loan balance for interest calculation purposes.
The larger the balance you maintain in the offset, the greater the potential reduction in the amount on which interest is calculated.
Your Offset Can Also Be Your Everyday Account
Depending on the product, you may be able to receive your salary, pay bills and manage everyday expenses from your offset account. This means your regular cash flow can potentially contribute to the offset balance.
Full Offset vs Partial Offset
Not all offset accounts work in exactly the same way. A full offset generally allows the entire account balance to offset the linked loan balance for interest calculation. A partial offset may only provide a percentage of that benefit.
What Should You Check Before Choosing One?
An offset facility can be useful, but it is important to look at the entire loan package rather than choosing a loan feature on its own.
Compare the interest rate, account fees, offset structure and other loan features to understand the overall value.
Potential Benefits
- Potentially reduce interest charged over time.
- Keep savings accessible.
- Use the account for everyday banking.
- Maintain a cash buffer for unexpected expenses.
- Potentially make your savings work harder.
Things to Consider
- The account may have fees.
- Not every home loan includes an offset.
- Some products offer partial rather than full offset.
- A higher interest rate can affect the overall benefit.
- Your personal savings habits matter.
Is an Offset Account Right for You?
An offset account can be a useful home loan feature if you regularly maintain savings and want those funds to remain accessible while potentially reducing the interest calculated on your loan.
However, the benefit depends on the loan structure, interest rate, fees, offset type and how much money you actually keep in the account.