Offset Accounts: Save Thousands on Your Mortgage

Understanding offset accounts

An offset account is a transaction or savings account linked to your home loan where the balance reduces the interest charged on your mortgage. Every dollar in your offset account reduces the loan balance used for interest calculations, providing immediate interest savings.

How offset accounts deliver savings

Offset accounts work by reducing the principal amount on which interest is calculated daily. For example, if you have a $400,000 loan and $50,000 in your offset account, you only pay interest on $350,000 of your loan balance.

• Interest calculated daily on loan balance minus offset account balance
• 100% offset provides dollar-for-dollar interest reduction
• Maintain full access to funds in offset account for transactions
• No tax payable on interest savings (unlike earning deposit interest)
• Savings accumulate over entire loan term for substantial benefit

Types of offset arrangements

Most offset accounts provide 100% offset, but some lenders offer partial offset arrangements with different benefit levels and account features.

100% offset accounts: Full offset accounts provide complete interest reduction for every dollar deposited, maximizing the benefit and making them the most popular choice for borrowers who qualify.

Partial offset accounts: Some lenders offer partial offset where only a percentage of your balance (such as 60-80%) reduces loan interest. These are less common but may be available with other attractive loan features.

Maximizing offset benefits

Strategic use of offset accounts can significantly amplify interest savings by optimizing cash flow timing and consolidating household finances.

Directing your salary into the offset account and paying bills just before due dates maximizes the average daily balance. Using credit cards with interest-free periods further extends the time your money works to reduce mortgage interest.

Cost considerations and break-even analysis

Offset accounts typically involve additional costs that must be weighed against potential interest savings to determine if they provide net benefits for your situation.

• Annual package fees ranging from $200-$400
• Higher interest rates on loans with offset features (typically 0.1-0.3%)
• Monthly account keeping fees on some offset products
• Transaction fees may apply depending on account type

Who benefits most from offset accounts?

Offset accounts provide greatest benefit to borrowers with substantial savings balances and higher loan amounts, particularly those in higher tax brackets who benefit from tax-free savings.

• High-income earners who benefit from tax-free interest savings
• Borrowers maintaining significant savings balances
• Those with irregular income who need transaction account flexibility
• Disciplined savers who can maintain higher average account balances
• Borrowers with large loan amounts where small percentage savings create substantial dollar benefits

Offset vs extra repayments strategy

Choosing between offset accounts and making extra loan repayments depends on your need for liquidity and flexibility versus forced savings discipline.

Choose offset accounts if: You want flexibility to access your savings while reducing interest, prefer maintaining liquidity for opportunities or emergencies, and can maintain substantial balances consistently.

Choose extra repayments if: You prefer forced savings discipline, want to permanently reduce loan balance, don't need easy access to surplus funds, and want to avoid offset account fees.