An offset account might sound like complex banking jargon, but it’s actually one of the most powerful tools available to Australian homeowners for reducing mortgage interest and paying off loans faster.
What is an Offset Account?
An offset account is a transaction account linked to your home loan. The balance in this account is “offset” against your loan balance when calculating interest. For example, if you have a $500,000 mortgage and $50,000 in your offset account, you only pay interest on $450,000.
100% Offset vs. Partial Offset
Most major lenders offer 100% offset accounts, meaning every dollar in the account reduces your loan interest dollar-for-dollar. Some smaller lenders offer partial offset (like 40-60%), which provides less benefit. Always clarify which type you’re getting.
The Power of Compound Interest Working For You
Here’s where offset accounts become powerful. Let’s say you have a $400,000 loan at 6% interest with $20,000 in offset. You’ll save approximately $1,200 per year in interest – that’s $100 per month! Over the loan term, this can save tens of thousands and years off your mortgage.
Tax Benefits
Unlike term deposits or savings accounts, money in offset accounts doesn’t earn taxable interest. Instead, you’re effectively earning a tax-free return equivalent to your home loan interest rate. For someone in the 32.5% tax bracket, this can be significantly better than traditional savings.
Flexibility and Liquidity
Your offset account functions like a regular transaction account. You can deposit your salary, pay bills, and access funds whenever needed. This flexibility makes it perfect for emergency funds or saving for renovations.
Maximizing Your Offset Strategy
To get the most benefit, funnel all your income into the offset account and use it for all expenses. Even if money only stays there for a few days, you’re still saving interest. Consider timing large purchases strategically – pay annual insurance or rates just after payday to maximize the offset benefit.
Multiple Offset Accounts
Some lenders allow multiple offset accounts linked to one loan. This can be useful for budgeting – separate accounts for bills, holidays, or emergency funds, all while reducing your mortgage interest.
Offset vs. Redraw Facilities
While redraw facilities let you access extra repayments, offset accounts are generally more flexible and don’t affect your loan structure. Money in offset accounts is technically yours, while redraw funds belong to the lender until withdrawn.
Consider the Costs
Offset accounts sometimes come with higher annual fees or require premium loan packages. Calculate whether the interest savings outweigh any additional costs based on your typical account balance.
Offset accounts work best for disciplined savers who can maintain reasonable balances. They’re particularly valuable for investors, high-income earners, and anyone with variable expenses or irregular income.