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Your 101 guide to a home loan offset account

An offset account could help you save on interest and pay down your home loan more quickly. Here’s how to weigh up if it’s right for you.

Does paying less interest and owning your home sooner sound appealing?

With an offset account, you may be able to make your spare cash work harder for you, giving you a way to pay less interest on your home loan.

Offset is one of those terms that you may have heard before, but what does it actually mean and how does it work? Let’s dive in.

What is an offset account?

An offset account is a transaction account that is linked to your home loan. It helps to reduce the overall amount of interest you pay on your home loan.

The money you have in your offset account balances against your outstanding loan amount. This means that your bank only charges you interest on your home loan balance minus the amount you have in your offset.

The effect is that you pay less interest on your home loan balance, which could help you pay off your home loan faster.

How does an offset account work?

An offset account has the same features as an everyday transaction account and works in a similar way. You can withdraw and deposit funds at any time. You can even get your salary paid straight into your offset account. You can also get a debit card and make ATM withdrawals from this account.

Here’s the big difference: the more money you have in your offset account, the more you can save – because the lender is only charging you interest on a reduced home loan balance, thanks to the amount sitting in your offset account.

Your home loan balance is made of two things: the principal – the amount that you borrowed – and interest charges that your bank has added.

Keeping funds in an offset allows you to reduce the combined amount of principal and interest charges you currently owe. This reduces future interest charges, as the amount in your offset account balances against the principal you borrowed to buy your home.

If you continue to add funds to your offset account and make regular repayments to reduce your principal, you may pay down your home loan and own your home sooner than if you did not have an offset account.

This is why it’s a smart idea for homeowners to keep any spare savings they have in an offset account, in order to make that money work harder for them.

Here’s an example: say you have a $500,000 home loan. You then deposit $10,000 into your offset account. You’ll now be charged interest on $490,000, instead of the full $500,000. As long as the $10,000 stays in your account, this will continue to offset the amount you still owe on your loan.

In this instance, let’s say the interest rate is 5 per cent and the initial loan period is 25 years. If you kept $10,000 in your offset for the loan term, you could save nearly $25,000 in interest repayments over the life of the loan (assuming you didn’t withdraw any of the $10,000 in your offset account).

Keep in mind, this is a simplified example – interest rates vary and the calculation doesn’t account for repayments that will reduce your loan amount over time. Interest charges are calculated daily, so every time you add funds to your offset, it will help to reduce your interest payable.

Also note that offset accounts are usually linked to variable rate home loans. At Westpac, we don’t offer offsets on fixed rate home loans.

What are the benefits of an offset account?

The main benefit of an offset account is that it may help you to reduce the amount of interest you pay on your home loan.

But there may be tax benefits too. Any interest savings you make from having money in your offset account are not taxed – as it’s not counted as income. On the other hand, interest earnings from your savings accounts are taxable.1

The beauty of an offset account is that, while it’s helping you reduce interest charges, the money isn’t locked up. You can use it as an everyday account and have access to the funds anytime, whether you need an extra bit of cash for a home renovation or a quick trip away, or even just to pay your grocery bills.

It’s worth knowing that you don’t earn interest in a mortgage offset account – as you would in a savings account – but what you save on your home loan interest repayments over the life of the loan may be more than what you’d earn in a savings account.

Are there any disadvantages to an offset account? 

There is a possibility that you could find yourself paying a higher establishment or monthly maintenance fee for a loan with an offset account. A home loan that has offset as a feature may also come with a higher interest rate than one without offset.

Depending on a number of factors such as fees and interest rates of comparable loans – and how much you are likely to keep in your offset account – the financial benefits of an offset account come down to your personal situation. So, you need to do those calculations and check the comparison rate of different loan options before deciding if it’s the right choice for you.

What are the different types of offset accounts?

There are two main types of offset accounts – 100 per cent offset and partial offset account. With a 100 per cent offset account, all the money in the account is offset against the home loan. With a partial offset, only a percentage of the account balance is offset against the home loan.

Using the same example as before, if you have a partial 50 per cent offset account linked to a $500,000 home loan and you had $10,000 in your offset account, then you would make interest payments on $495,000 of your home loan balance – i.e. your home loan balance less 50 per cent of $10,000. With a 100 per cent offset account, that would work out to be $490,000, as the full amount in the account is working towards offsetting your interest repayments.

At Westpac, we offer a 100 per cent offset account on our Rocket Repay variable rate home loan.

Redraw vs. offset – what’s the difference?

Redraw facilities are different to offset accounts. Both may be able to help you reduce how much interest you pay on your home loan, but they work in different ways.

While an offset account is basically a bank account that ‘offsets’ your account balance against your outstanding home loan balance, a redraw facility allows you to withdraw any additional repayments you may have made on your home loan account, over and above the minimum repayments.

You can deposit any regular savings you have in an offset account, and make withdrawals anytime, whereas a redraw facility only allows any extra repayments to be redrawn. This means that you can only ‘redraw’ the extra funds that you have already paid on top of your mortgage.

There may be less flexibility with redraw facilities, so homeowners who want to minimise the interest owing on their repayments while retaining quick access to their cash might find an offset account simpler to user.

Home buyers in Australia can have both offset and redraw facilities on their home loan. How you use both an offset account and a redraw facility depends on your circumstances and what works best for your financial situation.

So if you think an offset account is right for you, find out more about our home loan offset account or request a call back. One of our home lending experts will be in touch.

Things you should know

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice. Credit provided Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.

1 The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.