What is an offset account and how do I use it?

This article was adjusted from Canstar’s article “what is a mortgage offset account and how do they work” written by Ellie McLachlan on October 24 2018.

An offset account may help you pay less interest on your home loan. Here’s our guide to mortgage offset accounts and how they work.

What is an offset account?

An offset account is a savings account or transaction account linked to your home loan account. The account’s balance (or a proportion of that balance) is ‘offset’ daily against your home loan balance, and as a result you’re only charged interest on the difference between the total loan balance and the amount offset.

This means the lender charges you less in interest because they are not charging you interest on the full, actual remaining balance of your loan.

Offset accounts may be linked to either a variable rate loan or a fixed rate loan. Some home loans may specify that the offset applies for a fixed term, such as a 100% offset for a year against a 1-year fixed rate loan.

How does an offset account work?

Offset accounts work by offsetting up to 100% of the balance of the linked savings or transaction account against the balance of the linked loan.

In the case of a mortgage offset account, the balance of the account reduces the balance of the mortgage that incurs interest. For example, if you had a loan of $350,000, with $100,000 in a linked 100% offset account and $100,000 repaid, you may only pay interest on $150,000 of your balance.

How do I use an offset account?

If you have a variable home loan, ask your bank for a 100% offset account, some banks offer multiple attached to the one loan.

To minimise interest paid, many individuals put their pay and surplus money into their offset. These can also be used to save up for a goal when you have a home loan, similar to savings or other accounts.