Offset account
A transaction account linked to a home loan whose balance is taken off the loan before interest is charged.
An offset account is a transaction account linked to a home loan, generally a variable rate one. Its balance is subtracted from the loan balance before interest is worked out, so $50,000 in the offset of a $600,000 loan means interest is charged on $550,000. The repayment stays the same, so more of each one comes off the loan and it is paid off sooner.
Interest on most home loans is calculated daily, so money in an offset saves interest every day it stays there, and it can still be spent like any everyday account. Some lenders charge for the feature through a higher interest rate, an account or package fee, or both, which is worth weighing against what the offset saves.
Worked example
A $600,000 home loan at 6.2% over 30 years, with interest worked out daily, is $3,676.10 a month. Keeping $50,000 in the offset for the whole loan saves $214,917 of interest and finishes 4 years 10 months sooner, with the repayment unchanged.
Common mistake
Assuming the offset works because one was asked for. Moneysmart warns that some banks did not link offset accounts to their loans properly, so the money was not counted when interest was worked out. Check that the statements show the offset reducing the interest charged.
Grounded in Moneysmart (ASIC) — Mortgage offset accounts guidance. Figures last checked . General information, not tax advice.
Related terms
Loan amortisation
Paying a loan off in equal repayments that move from mostly interest to mostly principal.
Interest-only loan
A loan whose repayments cover only the interest for a set period, so the balance does not fall.
Balloon payment
A lump sum left owing at the end of a loan, which makes the regular repayments smaller.
Zero-based budgeting
Assigning every dollar of income a job until nothing is left unassigned.
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Questions about this term
Offset account: common questions
- Is an offset account better than making extra repayments?
- For the same money over the same time, both cut the interest by the same amount, because each reduces the part of the loan that is charged interest. The difference is access: money in an offset stays yours to spend, while an extra repayment is in the loan and comes back only through a redraw facility, if the loan has one. An offset can come with a higher rate or a fee, which can tip the balance.
- Does money in an offset account earn interest?
- It earns no interest of its own. It saves interest on the home loan instead, at the loan’s rate, for as long as it stays in the account.
- Does an offset account change the home loan repayment?
- The repayment stays as agreed. What changes is how it splits: with less of the loan charged interest, less of each repayment is interest and more comes off the balance, so the loan ends sooner.
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