What is a mortgage offset account?
A mortgage offset account is a transaction account linked to your home loan. It’s generally available with a variable rate home loan.
The balance in the offset account reduces the amount of your loan that’s charged interest.
For example, if you have:
- A home loan of $500,000, and
- $20,000 in your offset account
You’ll only be charged interest on $480,000.
You don’t earn interest on the money in your offset account. Instead, you save by paying less interest on your home loan. Over time, paying less interest means more of your repayments go towards reducing the loan balance. This can help you pay off your home sooner.
How does a mortgage offset account work day-to-day?
An offset account works like an everyday bank account. You can:
- have your salary paid into it
- pay bills and set up direct debits from it
- use a debit card with it.
Interest on most home loans is calculated daily; each day, your lender subtracts your offset account balance from your loan balance before calculating interest.
The more money you keep in your offset account, and the longer it stays there, the more interest you can save.
Is it worth having an offset account?
An offset account may be worth it if you:
- have a large loan, and
- keep a regular savings balance, and
- want flexible access to your money.
It may not be worth it if:
- you usually keep a low balance in the offset account, and
- the loan has higher fees to include an offset feature, and
- the interest rate is higher than similar loans without an offset account.
Some lenders charge annual package fees and higher interest rates for loans eligible to be linked to offset accounts and monthly account fees for offset accounts. It’s important to compare the cost of the fees with the interest you expect to save.
The higher your loan and the larger your offset balance, the greater the potential savings. But be realistic about whether you’d be able to justify any extra cost of having an offset account.
Using a credit card with an offset account
Some people use a credit card alongside their offset account to maximise interest savings.
For example:
- have your salary paid into your offset account,
- use a credit card for everyday spending,
- pay your credit card balance in full by the due date.
This keeps more money in your offset account for longer.
However - this strategy only works if you’re sure you can repay the credit card in full each month. The average credit card interest rate, at 18%, is much higher than home loan interest.
The difference between an offset account and redraw facility
Both an offset account and a redraw facility can potentially help you save on interest, but they work in different ways.
An offset account: Is like a separate transaction account linked to your mortgage. You can still access your savings whenever you need them. Your savings reduce the amount of your loan that gets charged interest.
A redraw facility: These are extra repayments you make go straight onto your loan. You may be able to withdraw those extra repayments if you need to. How and when you can access them depends on your loan terms.
Before you decide whether you need either option, check your lender’s fees, interest rate, and access rules.
What to consider before you apply for an offset account
Before you choose a loan with an offset account, consider:
✅ the interest rate – would it be lower if it didn’t have an offset account?
✅ any annual or package fees you’ll be charged for an offset eligible loan
✅ any monthly fees for the offset account
✅ whether the offset is 100% (where all the money in your transaction account can offset the home loan) or partial (where only a portion of your transaction account balance can offset your home loan)
✅ how it compares with a redraw facility
Even small differences in interest rates and fees can add up over time, so it’s important to compare the cost of the fees with the interest you expect to save.
Learn more about choosing a home loan, and paying off your mortgage faster.