Why Should You Use an Offset Account on Your Home Loan?

An offset account can cut the interest you pay on your home loan without changing your repayments.

If you are weighing up a loan, or wondering whether your current one is working hard enough, this is a good place to start. We'll walk through how it works, one worked example, and the trade-offs to check before you sign.

What Is an Offset Account and How Does It Work?

An offset account is a transaction account linked to your home loan. The balance in it is subtracted from your loan balance when the lender calculates interest, so you are usually charged interest only on the difference.

Think of it as a savings account that works against your debt. Your wages can go in, your bills can come out, and the money sitting there in between is reducing your interest. Your loan balance doesn't change, and your savings stay available to you. This feature is often called a linked offset or mortgage offset.

How Much Interest Could an Offset Account Save? A Worked Example

The saving equals the offset balance multiplied by your interest rate. At an illustrative rate of 6.75% p.a., every $10,000 sitting in offset avoids about $675 of interest a year.

As an example, consider a buyer with a $500,000 owner occupied home loan on principal and interest over 30 years. At the illustrative rate of 6.75% p.a., the repayment would be about $3,243 a month. The buyer keeps an average of $40,000 in the linked offset account, made up of savings and a few weeks of pay before bills go out.

Interest is then charged as if the loan were $460,000. That avoids about $2,700 in interest a year, or roughly $225 a month. The required repayment stays the same, so more of each payment goes towards the loan balance. That helps the buyer build equity faster than they otherwise would.

This rate is illustrative only. Your actual rate depends on your lender, your deposit and your loan type. You can also use a repayment calculator to test your own numbers.

Does an Offset Account Work With a Fixed Rate or Variable Rate Loan?

Offset accounts are most commonly offered on variable rate loans. Many lenders limit or don't offer a full offset on a fixed rate loan, so you need to check this before choosing.

If you like the certainty of a fixed rate but also want an offset, a split loan may suit you. One part is fixed, and the other part is variable with an offset attached. The trade-off is that only the variable portion gets the offset benefit, and fixed portions can have break costs if you leave early. If your fixed term is about to end, our fixed rate expiry page explains your options.

What Does an Offset Account Cost?

Some lenders charge an annual package fee for a loan with an offset account. Others set a higher interest rate on offset-enabled loans than on basic ones.

That cost matters because the saving only shows up if your balance is large enough. If you only keep a few hundred dollars in the account, a fee or higher rate could cancel out the benefit. A broker can compare the full cost of a loan with and without an offset across lenders, rather than just the headline interest rate. Our home loans page covers the range of loan structures we can look at with you.

Offset Account or Extra Repayments: Which Suits You?

Extra repayments and an offset account both reduce interest, but they differ in access. Money in an offset account stays yours to use. Extra repayments go into the loan, and getting them back depends on your lender's redraw rules.

For someone who likes a buffer for car repairs, school costs or a holiday, an offset account keeps cash within reach while still working for them. For someone who knows they will never touch the money, extra repayments can be just as effective, and they can suit a loan that has no offset at all. The risk with an offset account is behavioural. Easy access means the balance can slip if spending creeps up.

Is an Offset Account Worth It for First Home Buyers?

An offset account can suit first home buyers who expect to hold a cash buffer, but it isn't essential. If your savings will be close to zero after settlement, the benefit will be small at first.

Many first home buyers start with a basic loan and later move to one with an offset as savings grow. Refinancing is an option when that time comes, though it may involve fees, so weigh it up carefully. Our first home buyers page explains how we help with that first step, and our borrowing capacity page shows what you may be able to borrow before you start house hunting.

If you are using an offset account on an investment property, tax treatment can differ from an owner occupied home loan. Speak with your accountant before making decisions.

Is Your Current Loan Making the Most of an Offset?

If you already have a loan with an offset account, it's worth checking that your pay goes into it and that you aren't leaving idle savings elsewhere. Moving savings out of a standard account and into the offset can put them to work against your loan without extra effort.

If your loan has no offset, or the cost looks high, a loan health check is a low-pressure way to see how it compares with other options.

Frequently Asked Questions