What is an offset account?
An offset account is an account that is linked to your home loan. Instead of earning interest like a normal savings account, the money in your offset is used to reduce the interest payable on your home loan balance. Your offset account balance is subtracted from your loan balance when interest is calculated, meaning you pay interest on a smaller amount.
For example, if your home loan account has a loan balance of $500,000 and your offset balance is $50,000, you will only be charged interest on $450,000. This can result in significant savings over your loan term and may help you pay off your loan faster.
How an offset account works
To understand how offset accounts work, it’s important to look at how calculating interest on a home loan happens.
Your home loan balance is made up of two things:
- The principal – the amount of money you borrow
- Interest charges – the interest you pay on the principal, which lenders typically calculate daily and apply to your loan account monthly.
When you have a loan offset, your offset account balance is deducted from your total balance before interest is calculated.
That’s why it can be a smart idea to keep any savings in an offset account. Over time, it could potentially save you thousands of dollars and help you pay off your loan faster.
Variable rate home loans vs fixed interest loans
Offset accounts are typically available only for variable rate home loans and are rare for fixed rate mortgages. With a variable interest rate, your interest repayments can change, but you can also benefit more from the offset feature.
In contrast, fixed rate loans often have restrictions. This is because fixed loans are designed to provide certainty in your interest rate and interest costs, rather than flexibility.
If you are considering an offset home loan, it’s important to check the lending criteria and whether your loan type supports multiple offset accounts or only a single account linked to your loan.
Use our offset account calculator
Use our offset calculator to see how much you could save over the life of your loan. By entering your loan balance, interest rate and loan term, as well as your offset balance and deposit frequency, you can see how much less interest you may pay over time.
Check out the Westpac offset account calculator
Using both an offset account and a redraw facility
A redraw facility is another feature available on some home loans that allows you to access extra repayments you’ve made on your loan principal. Instead of keeping funds in an offset account, you deposit additional money directly into your home loan account, reducing your home loan balance.
The key difference between an offset account and a redraw facility is that with a redraw facility, your extra repayments reduce the loan balance itself, whereas an offset account keeps your money separate in a transaction account.
While both enable you to make extra repayments and access this money at a later date if you need to, there is a difference in how you deposit and access the extra funds.
If you want to access money from a redraw facility, you’ll need to transfer the funds into a transaction account. With an offset account, you can access the funds directly.
Which is best for you depends on your personal circumstances and any extra interest or fees you may need to pay for using it. Both can help you pay off your home loan faster.
Some lenders, like Westpac, offer home loans where you can have a redraw facility and up to 10 offset accounts, so you can enjoy the best of both worlds.
Read more about the difference between redraw and offset.
Pros of offset accounts
Flexibility
While your offset account is helping you reduce home loan interest charges, your money isn’t locked up. You can use your offset account like an everyday transaction account, allowing you to manage everyday expenses and easily move funds in and out, making it highly flexible.
So, if you need an extra bit of cash for a home renovation or a quick trip away, or even just to pay your grocery bills, you can use your offset account. Don’t forget though, as your balance reduces in your offset account, the interest saving will also be reduced.
Saving on interest payments
Because your offset balance reduces the amount on which interest is calculated, you will pay less interest over the life of your loan. This may significantly reduce your interest costs and potentially save you thousands of dollars.
Tax savings
Unlike a savings account where you earn interest, an offset account reduces the interest you pay on your home loan. This can be tax‑effective, as any interest you save isn’t considered income and generally isn’t taxed. In contrast, interest earned from savings accounts is usually treated as taxable income.
Reduce the length of your loan
By lowering your interest repayments, more of your repayment goes toward the loan principal, helping you pay off your loan faster and shorten your loan term.
Potential cons of some offset accounts
Higher rates and fees
Loans with offset features may incur higher interest rates or annual fees compared to basic loans. The offset account itself might also come with its own monthly account fee.
It’s worth noting that these fees are waived at Westpac if you choose the Premier Advantage Package with your home loan (a $395 Annual Package fee applies#). It’s important to check the relevant terms before choosing a loan.
Different types of offset accounts
There are two main types of offset accounts – 100% offset and partial offset account:
100% offset account: all the money in your account is offset against the home loan
Partial offset account: only a percentage of your account balance is offset against the home loan.
Here’s an example of how they differ:
Say you have a partial (50%) 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% of $10,000.
With a 100% offset account, that would work out to be $490,000, as the full amount in the account is working towards offsetting your interest repayments.
Multiple offset accounts linking to a single loan account can also help you manage different savings goals while reducing your interest costs. At Westpac, we offer 100% offset accounts (up to 10) on our Rocket Loan.
Learn more about multiple offset accounts
Key considerations
There are a few important considerations when it comes to offset accounts:
- Does your home loan qualify for an offset account?
- What are the account-keeping fees?
- Do you prefer a 100% offset or partial offset?
- How much do you need in your offset account to make it worthwhile?
- Your ability to access funds
To sum up
An offset account could be a smart way to reduce the interest you pay on your home loan, while keeping your money accessible. The more money in your offset, the less interest you pay, which means more of your cash goes towards your actual loan balance instead of interest costs. Over time, that can help you save money and pay off your loan faster (which your future self will thank you for).
Of course, check fees, interest rates, and your financial situation to make sure it all stacks up for you.
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