What Is an Offset Account and How Does It Work?

When researching smart ways to manage your mortgage, one question often comes up: what is an offset account and how does it work to reduce interest costs? If you’re paying off a home loan and want to get ahead financially, understanding offset accounts could help you save thousands and potentially shave years off your mortgage term.

What is an Offset Account?

So, what is an offset account? It’s a savings or transaction account that’s linked to your home loan. Instead of earning interest like a traditional savings account, the balance in your offset account is “offset” daily against your loan balance, reducing the amount of interest charged.

For example, if you have a home loan of $500,000 and $30,000 in your offset account, your lender will only calculate interest on $470,000. The more you have in your offset account, the less interest you’ll pay over time. It’s one of the simplest ways to use your existing savings to reduce loan costs without locking those funds away.

Offset Account Basics

So, how does an offset account work?

Home loan interest is typically calculated daily and charged monthly. With an offset account, the daily loan balance used to calculate interest is reduced by the balance in your offset account. That means even if your loan repayments stay the same, more of your money goes toward paying down the principal instead of interest.

The mechanics are simple, but the impact can be substantial. Over the life of your loan, even a modest offset balance can make a big difference in total interest paid and in shortening the loan term.

Some offset accounts are only available on variable rate loans, while others may be offered with fixed rate loans under specific conditions. It’s important to check with your lender about your eligibility and the terms.

Offset Account Benefits

The key offset account benefits include:

This flexibility makes offset accounts especially attractive to homeowners who keep some savings on hand or receive regular income deposits.

Offset Account vs Redraw Facility – which one works for me?

It’s easy to confuse an offset account with a redraw facility, but they serve slightly different purposes.

• An offset account is a separate everyday account that reduces loan interest based on its balance.
• A redraw facility lets you withdraw any extra repayments you’ve made on your loan – but funds are not always available instantly, and access might be limited.

While both help reduce loan interest, offset accounts are better suited to borrowers who want flexibility and quick access to their savings or investors who want to protect tax deductibility when offsetting investment debt. Redraws may be a better fit for borrowers looking to “set and forget” with their extra repayments.

Is an Offset Account Right for You?

If you regularly maintain savings, have a consistent income or hold investment loans, an offset account could be a valuable financial tool. It’s especially useful for:

• Professionals who receive regular pay and want to park funds before bills are paid.
• Savers who want their money working harder without sacrificing access.
• Homeowners focused on reducing loan interest over the long term.
• Investors who wish to maintain access to cash without affecting tax deductible interest

Our friendly mortgage experts here at North Brisbane Home Loans will give you all the advice and assistance you need to make the right choices. Contact us today and let’s get you sorted so you can get back to what you love doing best – not worrying about your mortgage.

Patrick Cranshaw

Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.