What Is An Offset Account And How Does It Work?

An offset account helps you pay off your home loan faster and save a lot on interest, all without paying a cent more in repayments each month.

But how does it actually work? And is it the right choice for you?

In this guide, we’ll walk you through everything you need to know. You’ll learn what an offset account is, how it works, the different types available, and how to use one effectively.

What Is An Offset Account?

An offset account is a type of everyday bank account that’s linked to your home loan. It looks and works like a regular transaction account, meaning you can deposit your salary, make withdrawals, and pay bills. But there’s one important difference: the balance in your offset account helps reduce the amount of interest you pay on your mortgage.

How Does An Offset Account Work?

At its core, an offset account helps reduce how much interest you pay on your home loan by lowering the amount your lender uses to calculate interest.

Here’s how it works:

Your offset account is linked to your home loan. Each day, your lender looks at how much money you have in your offset account and subtracts that from your loan balance before calculating interest. So instead of paying interest on the full amount you owe, you only pay interest on the difference.

Example:

If your home loan is $500,000 and you have $40,000 in your offset account, the bank only charges interest on $460,000.

Unlike extra repayments, the money in your offset account remains fully accessible. You can deposit, withdraw, and spend it like you would with any everyday bank account.

Naturally, the more money you have in your offset account and the longer you have it in there, the more interest you will save over time.

Now, offset accounts aren’t available with every loan or lender. To use one, you’ll typically need:

• A home loan with a lender that offers offset accounts for your loan product
• A transaction account linked to your home loan
• To meet the lender’s general eligibility requirements

Types Of Offset Accounts

There are two main types of offset accounts: a 100% offset account and a partial offset account.

100% Offset Account

A 100% or full offset account reduces your interest based on the entire balance in the account.

For example, if you have $20,000 in your full offset account and a $200,000 loan, the bank will calculate interest only on $180,000. This is the more popular option, as it saves you more interest over time.

• Variable-Rate home loans
• Principal & Interest (P&I) Loans
• Some Interest-Only Loans (Investment or Owner-Occupier)
• Professional Package home loans
• Some Fixed-Rate loans (with special conditions)
• Owner-Occupier & Investment loans (depending on the lender)

Partial Offset Account

A partial offset account reduces your interest based on a percentage of the account balance.

For example, with a 50% partial offset, a $20,000 balance would only offset $10,000. On a $200,000 loan, this means the bank would calculate interest on $190,000.

Partial offset accounts are often offered when a full offset account isn’t available. This is usually the case with certain loan types, including fixed-rate home loans, some low-doc loans, construction loans, basic home loans, and certain interest-only loans.

Use Multiple Offset Accounts To Save Smarter

Some lenders let you link multiple offset accounts (even up to 99!) to a single home loan. This gives you more flexibility to manage different types of income or savings without losing the interest-saving benefits of an offset.

For example, you might have:

• One account for your salary
• Another for rental income
• A third for savings or emergency funds

The combined balance across all linked accounts reduces the loan amount on which interest is calculated. This helps you keep your finances organised while maximising your interest savings.

Note: Fees and conditions may apply to each account, depending on the lender and loan product.

How To Make The Most Of An Offset Account?

To get the most from your offset account, try these smart money habits.

Deposit Your Salary Into Your Offset Account

When you direct your paycheck into your offset account, it ensures your funds are working to reduce your loan interest as soon as possible. Even short periods with higher balances can contribute more to overall savings.

Pool All Your Extra Money Into Your Offset

You should deposit any surplus funds, such as bonuses, tax refunds or savings, into your offset account. The higher the balance, the greater the interest reduction.

Use A Credit Card And Pay Before Due Date

Use a credit card for daily expenses and pay the balance in full before the due date. This helps you keep your money in the offset account for a long period. You also maximise the time your funds are offsetting your loan interest. Note that this method requires strict discipline to avoid credit-card interest.

Pros And Cons Of An Offset Account

You need to factor in the pros and cons of an offset account before deciding if it is for you.

Pros

• Reduce the amount of interest paid on your mortgage
• Can reduce your loan term
• Your savings remain accessible at any time
• Interest savings you make with an offset account aren’t taxed
• Helps manage cash flow and emergencies
• You can link up to 99 offset accounts to a single variable rate home loan

Cons

• May come with monthly account fees or package costs
• You need higher deposits for noticeable benefits
• Not available with every home loan type

Offset vs Redraw: What's the Difference?

Explore the full breakdown in our Offset vs Redraw Facility guide.