What is an Offset Account and How Can It Save You Thousands?

Your home loan's offset account can significantly reduce the interest you pay across the life of your mortgage. An offset account is a transaction account linked to your home loan. The balance in this account is offset daily against your loan amount, reducing the amount of interest charged.

Rather than earning interest like a savings account, the money in your offset account works to reduce the interest payable on your mortgage. For example, if your home loan balance is $400,000 and you have $20,000 in your offset account, you're only charged interest on $380,000.

This simple feature can help lower your interest costs and may reduce the time it takes to pay off your loan.

What is an offset account and how does it work?

An offset account works much like an everyday transaction account but with one major difference: it reduces your mortgage interest. The money in your offset account doesn't earn interest. Instead, it helps reduce the interest you owe on your home loan by offsetting your loan balance.

The benefit is in the daily interest calculation. Every dollar you keep in your offset account works to lower the amount of interest charged each day. This means your regular spending account could be saving you money on your mortgage, especially when your salary and savings are deposited straight into the account.

Unlike extra repayments through a redraw facility, the money in your offset account remains fully accessible. You can:

  • Use a debit card for everyday purchases
  • Withdraw cash from ATMs
  • Make online transfers
  • Get your salary paid into it

It offers greater flexibility while also helping reduce the interest on your loan.

Full (or 100%) offset accounts are the most effective. Every dollar in the account reduces your interest. Some lenders also offer partial offset accounts, but these are less impactful as only a portion of your balance offsets the loan.

Types of offset accounts

There are two main types of offset accounts:

Full offset account (100%)

The entire balance in your offset account is subtracted from your home loan for interest calculation purposes. This is the most effective type and is commonly linked to variable rate loans.

Partial offset account

Only a portion of your offset balance is used to reduce the interest on your home loan. Some lenders apply a lower interest rate to the portion equal to the offset, rather than removing interest on it entirely.

Some lenders also allow multiple offset accounts to be linked to a single home loan. This can help you organise your money while still saving on interest. For example, you might have separate accounts for household bills, savings, and emergencies.

When comparing offset account options, look for:

  • 100% offset structure
  • Easy access to funds
  • No account-keeping fees
  • No minimum balance requirements or withdrawal limits

Offset accounts are usually available on variable rate loans, though some lenders offer them with fixed-rate options as well. Choosing the right offset account depends on your financial habits and how much money you typically keep in the account.

Offset account vs savings account vs redraw facility

Understanding the differences between an offset account, a savings account, and a redraw facility can help you decide which option suits your needs.

Savings account

Earns interest on your balance. However, this interest is considered taxable income.

Offset account

Reduces the interest charged on your home loan. The savings here aren’t taxed, making it more tax-effective than a savings account.

Redraw facility

Allows access to extra repayments made on your home loan. Unlike offset accounts, redraws may require advance notice or have withdrawal limits. Some lenders also charge fees for using this feature.

Offset accounts offer greater flexibility because the funds are readily available through ATMs, debit cards, and online banking. Redraws may take more time or have limitations.

Many borrowers use both options: keeping accessible funds in an offset account while making additional repayments they can access through a redraw if needed.

Frequently Asked Questions

Can I have more than one offset account?

Yes. Some lenders allow multiple offset accounts to be linked to the same home loan. This can help you budget by separating your savings into different accounts while still reducing your interest.

Do I need a certain amount of money in my offset account for it to be worthwhile?

Not necessarily. Even a small balance in your offset account can reduce the interest you pay. However, the more money you keep in the account—and the longer you leave it there—the more interest you'll save.

Can I access the money in my offset account anytime?

Yes. Offset accounts are designed to function like everyday transaction accounts. You can deposit or withdraw money at any time using a debit card, ATM, or online banking.

Is an offset account better than making extra repayments?

It depends on your situation. Offset accounts give you full access to your money while still reducing interest. Extra repayments via redraw may offer similar benefits, but some lenders restrict access or charge fees to withdraw.

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