Mortgage Offset Accounts: How Do They Work?

In this article we cover:

• What is an offset account?
• Pros and cons of an offset account
• Does an offset account reduce monthly repayments?
• How to use an offset account
• How to choose an offset account
• What’s the difference between an offset and a redraw facility?
• What are other ways I can save on my home loan?

What is an offset account?

An offset account is a transaction account that is linked to your home loan. The account’s balance is offset daily against your home loan balance. As a result, you’re only charged interest on the difference between the total loan balance and the amount offset.

For example, if you have a home loan of $400,000, and $50,000 in a linked offset account, you will only pay interest on $450,000 of your balance.

Some mortgage lenders only permit you to link one offset account, while others allow you to offset multiple accounts against your mortgage.

Pros and cons of an offset account

Pros:

• Pay less interest on your home loan. By having money in your offset account, you can cut years from your home loan and pay thousands less in interest. You don’t necessarily need a huge amount of spare savings, either, for every cent in your account saves interest off your loan.
• Get your savings to work harder for you. Home loan interest rates are typically higher than the interest rates on savings account. Therefore, your savings can work harder for you in an offset account, compared to a regular savings account.
• Keep extra funds at hand. An offset account can be an easy way to keep excess funds at hand, while still minimising interest payments on your mortgage. If your financial situation changes, you can easily access the money offsetting your mortgage.

Cons

• Offset accounts are usually only offered on variable rate home loans, which attract a higher rate of interest. Therefore you’ll need to offset at least the additional interest charges to make savings.
• Some mortgage lenders charge fees on their offset accounts.

As the financial benefits of a mortgage offset account depend on a number of factors, it’s important to weigh up your individual circumstances to determine if an offset account is right for you.

Does an offset account reduce monthly repayments?

When you have an offset account, your monthly repayments typically stay the same, even though you may be charged less in interest.

This affords you the opportunity to repay your loan faster. As the offset account helps reduce the amount of interest being added to your loan, more money goes towards paying off the principal (your loan amount).

How to use an offset account

The more money you put into an offset account, the more interest you will typically save on your loan. To help maximise the balance of your offset account, one option is to get your salary deposited directly into your offset account and then use the account as an everyday transaction account.

Because your home loan is offset on a daily basis, the longer you keep your money in an offset account, the more interest you can save.

If you have a credit card and are disciplined with your spending and repayments (i.e. you repay the card balance in full each month), another option could be to use your credit card to pay for your everyday expenses.

This would leave more of your salary in your offset account for longer each month, thus saving more interest on your home loan. However, you would need to make sure you repay your credit card in full and on time each month.

Also, remember that you don’t have to put your entire home loan on a variable rate to use an offset account. By splitting your loan, you could set most of your mortgage at a lower fixed rate, and keep just a small proportion on a variable rate with an offset account. This could help further reduce your overall interest costs.

How to choose an offset account

When choosing a home loan with an offset account, consider features such as:

• An account where 100% of your total balance is offset against your loan
• No minimum balance, so every cent in your offset account is working for your loan
• No maximum balance limit, so you can keep growing your savings and paying less in interest on your home loan
• Low or no fees on the offset account
• The ability to use your offset account for the transaction types you need, such as debit card, ATMs, eftpos, direct debit and in-branch
• The ability to link multiple accounts as offset accounts to your loan

What’s the difference between an offset and a redraw facility?

Offset accounts and redraw facilities are both common home loan features. However, there are some differences, and it’s important to consider which would work best for you.

A redraw facility is a feature available on some floating-rate loans. It allows you to withdraw money that you’ve already contributed to your home loan. The balance of the redraw facility is whatever extra payments you have made towards repaying your loan.

Compare with Canstar for the Lowest Mortgage Rates

One of the best places to start your hunt for the lowest mortgage rate is Canstar’s home loan database, ratings and awards. Not only can you compare 245 different mortgage products from 11 lenders, you can discover which loans and lenders earn Canstar’s top awards for value and service, as judged by our expert research panel.

The table below displays some of the 1-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for home owners. This table is sorted by current interest rates (lowest to highest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

What are other ways I can save on my home loan?

Being mortgage-savvy can potentially save you tens of thousands of dollars over the life of your home loan, depending on the loan size and savings techniques used.

Here are some ideas that could be worth weighing up that could help improve your home loan saving strategy:

1. Secure a lower interest rate. Do some research to get an idea of what interest rates are available for home loans with the features you’re looking for. Then consider negotiating a lower interest rate with your current lender or refinancing.
2. Keep your repayments the same. If you get a lower rate, maintaining your monthly repayments at their previous level will help you repay your loan faster, and save money on interest over the life of your loan.
3. Increase your regular payments. Making an effort to put some extra spare cash towards your mortgage (additional repayments) each month can help you repay your loan faster. You might like to try Canstar’s extra home loan repayments calculator to see how much you could save.

You can also check out our range of other home loan calculators to help you get a better understanding of your financial situation. Not only can you compare mortgage rates for free on our site, we publish expert research into the best lenders in the market. To compare current mortgage rates, click on the big button below.

About the author of this page

This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.