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Offset mortgages

What are home loan offset accounts and how do they work?

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By

Richard Whitten

&

Alison Loveder

Updated

Fact checked

An offset account is a bank account attached to your mortgage. Every dollar saved in an offset account reduces the amount of interest you’re charged, which means interest is calculated on a smaller principal amount, saving you money. For example, if you have $200,000 left to repay on your mortgage but save $15,000 in your offset account, your interest charges are calculated based on $185,000.

An offset account is a handy feature because it lets you build up your savings account, access and spend your cash when you need it, and repay your home loan faster. But, crucially, not all mortgages come with this feature. So you need to make sure you get a loan that is eligible to have an offset account attached to benefit from this feature.

First, however, it’s essential to understand how offset accounts work and if they are the right choice for your financial situation.

How do offset accounts work?

This diagram explains how Offset accounts workYou can put income or savings into an offset account like a regular bank account, but you won’t gain any interest. Instead, the money temporarily reduces (or offsets) your loan principal (the amount of money you owe on your mortgage).

By offsetting your loan principal, you pay less interest. Your monthly repayments won’t change, but you repay more principal and less interest.

Putting money into an offset account is like making extra mortgage repayments, except you can withdraw the money and spend it if you need to.

Regular mortgage (no offset account)
  • Loan amount: $500,000
  • Interest rate: 2.8%
  • Loan term: 30 years
  • Monthly repayment: $2,054
  • Total loan cost (including interest) = $739,610
Mortgage with an offset account

Taking the same scenario, let’s say you have $20,000 in your savings account. You’d like to access that money in case of emergencies or unexpected expenses, so you save the $20,000 in your mortgage offset account.

Your monthly repayment remains the same – you now pay less interest and more of the principal each month. The amount of interest you have to pay overall is reduced because it’s based on a loan balance that is $20,000 lower.

  • Loan amount: $500,000
  • Interest calculated on: $480,000
  • Monthly repayment: $2,054
  • Total loan cost (including interest) = $714,450
  • Interest savings with offset = $25,159 less over the life of the loan

Assuming you leave your $20,000 saved in the offset and don’t spend it, you save over $25,000 in interest. Also, you repay the mortgage sooner because you pay less interest and more principal in each repayment. In our example, you’ll own your home outright a whole year earlier than without the offset account. That’s 12 months that you don’t have to hand over $2,054 each month for your mortgage repayment. It’s like getting your mortgage for free for an entire year!

Quick offset tips

How much you can save using an offset account depends on multiple factors, including your mortgage amount, interest rate, how much money is in the offset account, when you put it there and how long it stays there.

However, there are a few things you can do to maximise your savings when using an offset account:

  • Add money early. If you add $10,000 to your offset account at the start of a 30-year mortgage, it saves you more than if you add that money five years into the loan. Any amount, even $1,000, has an impact over the long term.
  • Add money often. If you can add extra savings into your offset account regularly, you save even more in interest. If you can, have your salary or wages paid directly into your offset account, so your money is offsetting your interest during the month (before you spend it!)
  • Limit withdrawals. If you need to pull money out of your offset, you can, and it’s easy to do so. It’s just like withdrawing cash from any bank account. However, this readjusts calculations of your mortgage repayments, so try to keep as much money in the account as possible. For example, pay bills on the last available due date, so your money offsets your interest for a few more days.

Offset account calculator

Use our calculator below to calculate the time and interest you can save on your mortgage when you put some money into an offset account.

All you need to do is enter your mortgage details, the amount you wish to put into the offset account and how far into your mortgage you currently are.

Offset savings calculation examples

Here are some hypothetical mortgage scenarios showing how much time and money a single amount of cash in an offset account can save you. Note that all these estimates assume a 30-year mortgage with the offset money saved two years into the mortgage.

Loan amountRateOffset savingsInterest savedYears saved
$350,0003.25%$34,000$44,7102 years 5 months
$450,0002.59%$50,000$47,3782 years 2 months
$600,0002.90%$40,000$46,4051 year 7 months
$800,0003.00%$50,000$61,1411 year 6 months

Should I make extra repayments or put the cash into an offset?

At first glance, an offset account seems similar to making extra repayments on your mortgage and using a loan’s redraw facility to pull money out as needed. In both situations, you get a reduction in interest charges, pay off your loan faster and still have access to your money, in theory.

However, an offset account offers you more flexibility and control. Money in an offset account belongs to you. Extra repayments belong to your lender and redraw facilities can come with restrictions or fees. Plus, your lender can change the rules and make it harder for you to access the money.

How an offset account works when selling your old home and buying a new one?

It’s hard to time the sale of your old home so that it lines up with buying a new one. Until your home sells, you may not have a deposit to cover the new purchase, and many buyers in this situation take out a bridging loan.

However, if you have an offset account and you’ve made regular payments, you may have access to enough savings to withdraw and use it as the deposit on your next property.

How an offset account works when turning your home into an investment?

Let’s say you decide to convert your current home into an investment property while you buy a new home.

If you have paid off most of your mortgage, that means you won’t have much interest expense to claim at tax time. However, you could then end up paying extra tax, as the rental income you receive for your investment property is added to your taxable income.

However, suppose you put your savings into an offset account instead of making extra repayments towards your mortgage. In that case, you can withdraw those savings at any time, which means you’ll be paying the maximum interest again. All of which is tax-deductible on an investment loan. You can then use your savings to help you purchase your new owner-occupier home.

What if my offset savings are equal to my mortgage amount?

If you save enough money over many years, your offset savings could eventually equal the amount that you owe on your mortgage, which is a great position to be in! First, however, you have to decide what to do next.

You’ve essentially paid your mortgage off, and if you want to end the loan, you can move the offset savings over and then discharge the mortgage. Now you’re debt-free.

However, all of your offset savings have now been spent. If this is the bulk of your savings, you are suddenly very low on cash, which leaves you financially vulnerable if an emergency or unexpected expense arises.

You could decide to repay most of the mortgage but leave some savings accessible while paying the final loan amount. Or, you could continue with your savings offsetting your mortgage, which means that every mortgage repayment you make pays down the loan’s principal, and you won’t be paying any interest at all.

If you’re not sure what the best option is, consider speaking to an experienced mortgage broker.

Are there any disadvantages to using an offset account?

There aren’t any significant downsides to using an offset account. Although there are some issues, you should be aware of.

  • No interest earned. Unlike a savings account, money in an offset account won’t generate interest for you. However, saving interest from a mortgage generally nets you a more significant gain than a savings account rate. However, with mortgage interest rates currently so low, it might be worth investigating the most competitive savings account offers to see which saves you more money.
  • Some offsets aren’t an offset mortgage. For example, some lenders may label your extra repayments as an offset when it’s a redraw facility, which means you have less access to the money.
  • Partial offsets. Some offset accounts don’t offset the amount deposited 100%. These are called partial offsets, and they are less beneficial for the borrower.
  • Offset money only reduces your loan while it’s saved. If you save $20,000 in an offset for four years and then spend it buying a car, your loan amount re-adjusts, and you pay the higher interest rate again. However, every day that money sits in your offset account, it produces some benefit to you.
  • Your rate could be higher with an offset. However, many lenders offer their lowest mortgage rates on “basic” products that don’t have an offset account, and they offer a mortgage with an offset account with a higher rate. Our suggestion: shop around for a mortgage that has both a low rate and an offset account.

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