What is an Offset Account? How does an Offset Account Work?

This is the most comprehensive guide to Offset Accounts in Australia.

The best part?

I’m going to show you techniques for saving thousands of dollars that are working right now (in 2022).

In short: If you want to buy a home and pay it off quicker, you’ll love this guide.

Let’s get started.

• Offset Account Basics
• Best Variable Home Loans with Offset Accounts
• Fixed home loans with Offset accounts
• Different types of offset accounts
• Offset Account Disadvantages
• What would an offset account save me?
• Do the home loan repayments stay the same with an offset?
• What makes the best offset account?
• Is a redraw facility the same as an offset account?
• Are there any tax implications in deciding on redraw vs offset?

Offset Account Basics

An offset home loan account allows you to pay off your loan quicker by reducing your interest payments.

An offset account is the same as your regular savings, or transaction account and it works by only charging you interest on the balance of your home loan minus any the money you have in the offset account.

For example, if you borrowed a loan of $300,000 and have $20,000 in your transaction account – With an offset loan, you will only pay interest on $280,000 due to the offset account balance.

The offset account is great for families that have high monthly expenses and a dual income stream, however depending on your lender, always be sure to check if there are any fees or extra expenses around setting up an offset account.

What does an offset account do?

Offset accounts can be a great way to save on interest for your overall home loan. But what exactly does an offset account do?

An offset account is a savings account tied to your main home loan account. Any money that you put into your offset account is taken off your home loan which means that you are only charged interest on the difference in the total loan balance.

Here is another Offset Account example, where you can put all of your savings, money that is ready to pay bills or even cash you have waiting to spend on your kids education into one 100% offset account. This will reduce your loan by $12,500 and save you on interest.

Simply put, by having more savings in your offset account, you will be charged less interest on your remaining home loan, making the proportion ‘offset’.

You can choose whether your offset account is a variable or fixed rate loan however some lenders have specific terms around the loan type.

How does an offset account work?

An offset account is a linked account that allows you to do transactions via cheque or ATM.

You can deposit money in the offset account just like any other bank account and use it to spend on day to day expenses.

The interest expense on your home loan depends on the account balance.

The higher the account balance, lower the interest charge will be.

Below are some of the things you should consider, to make the most of your offset account:

• ✅ Depositing your salary into the account on a regular basis to avoid the high-interest charges
• ✅ Maintaining sufficient balance in the account to be able to repay the loan without delays
• ✅ Using the offset account for purchases via BPAY, chequebook, internet banking, EFTPOS, and debit card
• ✅ You can also redraw money in the offset account from the home loan account and can make repayments from the offset account to the home loan account.

Offset accounts give flexibility around making extra repayments to your loan, and being able to access the funds when you need.

Best Variable Home Loans with Offset Accounts

Here is a list of lenders who are offering 100 percent offset home loan account

• ING Bank limited offers an Orange Advantage Home Loan
• Citibank provides a Mortgage plus Package Home Loan
• AMP Limited has basic and professional loan packages with offset accounts
• Bank of Queensland: Provides an offset account in their Privileges Package, and also partial offset account on their fixed rates.
• BOQ Specialist: Offers an offset account as a part of their BOQ Specialist Banking Package.
• National Australia Bank has various 100 percent offset account packages, including National Flexi Plus, Tailored Home Loan, and Tailored Home Loan Choice Package
• ANZ Bank offers 100 percent offset account with Standard variable rate loan, Breakfree standard variable package, Breakfree standard variable residential land loan, and Professional benefits standard variable residential land loan.
• Suncorp Bank: Offers 100 percent Offset Account with Standard Variable Rate Loan and Money Manager Standard Variable
• St George Bank has various home loan packages, including Advantage Home Loan Package with 1-year discount variable rate, Advantage Home Loan Package with Standard Variable Rate, and Standard Variable Rate Home Loan.
• Westpac provides Rocket Repay home loan, Premier Advantage Rocket Repay Home Loan, and Premium Advantage Rocket Investment Loan
• Commonwealth Bank of Australia offers offset account with 12 Month Discounted Variable Rate Loan, Standard Variable Rate Loan, and MAV Standard Variable Rate Loan.

Most Australian banks offer loans with an offset account, the question is how much extra does it cost and does it suit your overall situation.

Fixed home loans with Offset accounts

You can use an offset account with different types of home loans, including investment loans, fixed rate loan, and a basic loans but it is less common. 

Using Offset Account with Fixed Rate Loan

There are only a few lenders who allow borrowers to use 100 percent offset home loan account with their fixed rate home loan.

It offers flexibility in terms of enjoying a fixed rate and having offset account with credit card, check, and ATM access. The downside is that can come with a higher interest rate, so you could look at a split home loan to make the most of this. 

With a Split Loan you can go part fixed, part variable with an offset account attached to get the best of all worlds.

Using Offset Account with a Basic Loan

Although large banks do not offer offset accounts with a basic loan, there are some non-bank lenders, building societies, and small banking institutions that provide basic loan with an offset account. People who want to avoid ongoing fees and get the benefit of an offset account should apply for it.

The majority of Basic Home loans do not have an offset account, they do however have redraw which is the ability to withdraw any additional payments you have made to your loan.

Using Offset Account with Investment Loan

An offset account can be quite useful for those who have an investment loan (tax deductible) on their investment property. However, any additional payments in the loan account will not be tax deductible if you redraw them in the future (depending on the purpose that you use these funds for of course). 

In order to determine if the loan is tax deductible or not, the Tax Office focuses on the purpose of why the amount was redrawn.

BUT you can avoid this issue by making additional payments in an offset account.

We find younger home buyers make lots of additional repayments into an offset account when they initially buy a home, which they intend in turning into an investment property in the future.

To get a better understanding of how you can get a tax benefit from an offset account, you should consult a financial advisor or speak to our team at Hunter Galloway.

Your situation is going to determine if an offset account makes sense.

Different types of offset accounts

Depending on your requirements, there are typically two different types of offset accounts; full offset, and a partial offset.

• ✅ A full offset account: Offsets 100% of the balance within the offset account, against the mortgage and reduces your interest accordingly. This is the most common type of offset account.
• ⛔️ A partial offset account: Does not offset 100% of the balance within the offset account, and typically offsets 40-50% and is used in the case of fixed rate home loans. In other words, if you have $10 in the offset account, a 40% partial offset will only reduce your interest by $4.

Be sure to go through this option carefully with your mortgage broker to understand what your offset options are, and if splitting your home loans is an even better idea.

Bonus: Multiple Offset Accounts

While not a different type of offset account (they are usually full offsets), there are some banks that offer multiple offset accounts.

In other words, you can have more than 1 offset account linked to your home loan – reducing the interest you pay.

Multiple mortgage offset accounts is particularly useful if you have more than one transaction account, like an investment property that receives rent.

Offset Account Disadvantages (and positives)

An offset account can be a great way to cut down interest on your home loan and the best part is, you don’t always need a massive amount of spare cash lying around.

There are both positives and disadvantages in offset accounts.

• ⛔️ Most of the time you end up paying higher fees for a loan with an offset account, this is usually your banks annual bank package or sometimes a monthly offset fee. 
• ⛔️ You may also need to pay higher interest rates to get a home loan product with an offset account attached.
• ⛔️ You get the same net benefit of an offset account in a variable home loan with redraw, usually at a lower cost. 

The fees, and rates are something to compare when you’re looking at lending options and factor in how much you are likely to keep in the offset account vs. the extra costs in having an offset feature. 

There are some positives to offset accounts including:

• ✅ Provided you have a 100% offset account, really, every dollar that you put into your account is saving you more money.
• ✅ What we love about offset accounts is that they’re super easy to manage. You can arrange for your employer to put your salary into your everyday account and then link it to your offset account. And just like that, it’s saving you money on interest repayments. The simplicity of it is such a great way to get the most out of your home loan.
• ✅ Another positive of having an offset account is that it’s a simple way to keep your funds accessible, they’re not locked into the account and can be withdrawn quickly. So if an emergency were to occur and you needed to access the money, you can access the money without having to touch extra repayments made on your home loan.

Each individual situation varies and it’s important to keep these factors in mind.

What would an offset account save me?

So you’re probably thinking, this offset account sounds a little too good to be true? But let’s take a look at exactly what an offset account would save you.

Offset accounts can be a great way to reduce interest on your home loan, so we’ve broken it down into a table for you to clearly compare the benefit of holding money in the account against a $400,000 home loan.

As you can see above, in three years you could save thousands from your loan, and not only that cut YEARS from your mortgage term. 

And if you think you could pay off your loan pretty fast, then you’ll be reaping the most benefits.

Do the home loan repayments stay the same with an offset?

Home loan repayments generally stay the same with an offset account however the benefit is that you can repay the loan faster because more money is going towards the principal of the loan rather than the interest.

The offset account helps to reduce how much interest you are paying which means that you can fast track your loan repayments.

You can see in the table above that the amount paid off the loan with a higher amount in the offset account increases, overall paying back your mortgage repayment a lot faster than if you didn’t have an offset account.

While your monthly repayment would remain the same, the amount of interest you would pay each month slightly decreases and so you pay slightly more principal meaning you would save $37,726.50 in interest over 30 years!

So yes, the repayments stay the same, however, as you’re paying more principle rather than interest this is what essentially fast tracks your loan repayments.

What makes the best offset account?

The process of setting up an offset account can be easy with the help of a mortgage expert. However, understanding the features around what makes the best offset account is important.

Ideally, look for an offset account that has the following features:

• ✅ 100% full offset on your total balance not a partial offset account.
• ✅ No minimum balance in order to offset the account. This means that every cent is helping.
• ✅ No maximum limit. So no matter high big your savings get, it won’t affect the offset account.
• ✅ Minimum fees on the offset account. This one can be a sting so pay extra attention to the fees around the offset account.
• ✅ Use of your account as a standard savings account – debit, ATM, EFTPOS, BPAY etc. Ideally, look for an account that behaves just like a regular savings account.
• ✅ The ability to link multiple offset accounts to your loan.
• ✅ An even better interest rate on your savings account, at least equal to your mortgage interest rate.

Is a redraw facility the same as an offset account?

In short yes, a redraw facility has the same net benefit as an offset account being you can make extra loan repayments to reduce your interest payable – but also be able to draw the funds back out.

But there can be some confusion around the difference between an offset account and a redraw facility.

There are a few key differences that will help simplify the benefits of an offset account over a redraw facility.

The key differences include:

Offset account:

• ✅ Money is accessible at any time.
• ✅ Acts as a regular savings account and holds spare money.
• ⛔️ Some transaction fees.
• ⛔️ Discipline is required as the money is so easily accessible.

Redraw facility:

• ✅ Enforced discipline as the money is not easily accessible – you need to apply for the money in advance.
• ✅ Usually has lower fees, and interest rates than loans with Offset Accounts
• ⛔️ Only available for additional repayments that go beyond your standard monthly repayments.
• ⛔️ Some banks charge fees if you are making more than 1-2 redraw withdrawals per month. 

Are there any tax implications in deciding on redraw vs offset?

This is often overlooked, but an important consideration if you ever intend on turning your property into an investment.

Note: This is general advice only, it doesn’t take into consideration your individual situation, and we strongly suggest you seek the advice of a tax accountant. 

Redraw

If you put extra money into your loan and redraw these funds for non-investment purposes (or private purposes like buying home furniture), then the interest spent on that amount is no longer tax deductible in the eyes of the ATO.

In the below example, redraw won’t affect tax-deductibility if you use the funds for income-producing purposes but could reduce the tax-deductible amount of your loan if you use the funds for private purposes like buying home furniture.

Offset

Any transfers in and out of your offset account will not affect the tax deductibility of your loan account and in general, won’t affect the amount of your interest expense.

Specifically, the ATO gives an example:

Question:

I’ve done a little research into the benefits and differences between a 100% offset account linked to my investment property loan, and a redraw facility. Under my current loan structure, these seem almost the same to me – the offset account offsets the amount on which interest is charged, whereas the redraw facility reduces the principle, in turn reducing the amount on which interest is charged. I’m not sure what the different tax implications are between the offset account and the redraw facility? I’m just trying to figure out the best way to pay down the mortgage!

Answer:

Providing you don’t take any of the money back out, it won’t make any difference. This assumes that you have a 100% offset account. Some lenders have a lower offset percentage.

 

If you are likely to redraw any of the funds before you move into the property, it depends on what what you use the withdrawn funds for. If you were to use them for an income producing purpose e.g. buy shares it is better to pay your spare funds onto the loan and redraw the amount when you buy the shares. This mean that you can continue to claim a deduction for interest expenses for purchasing the shares. If you use the funds for a private purpose e.g. to buy home furniture, it is best to put the spare money in your offset account. This would allow you to continue to apply 100% of the loan interest against your rental income.

Any other ways to save interest on an offset home loan?

Spend a bit of time learning about how to save interest on your home loan and you could end up saving thousands of dollars over the life of your loan.

To help you get started, we’ve listed out a few ideas worth considering in order to increase home loan saving strategies and save interest on your home loan.

• ✅ Keep your repayments the same: If your repayments go down, instead of dropping them, aim to maintain your monthly repayment at what it previously was. This is a quick hack that will help you repay your loan quicker.
• ✅ Increase regular repayments: If you’ve got a bit of spare cash lying around, put it towards your mortgage. These small extra repayments can help a lot.
• ✅ Aim for a lower interest rate: Compare different rates and ensure that the rate you’re locking in is the best you can find. Speak to your broker about refinancing if you’re currently at an interest rate that isn’t the best you can get.
• ✅ Make sure you’re not paying too much in fees. This one can come as quite a surprise, so double check it the fees your paying.
• ✅ Set up fortnightly repayments. Instead of opting for monthly repayments, pay fortnightly. This will help reduce extra interest repayments because you’re making an extra repayment each year.

Should you get a Mortgage Offset Account, or use Redraw?

Overall each Bank, Lender and Credit Union has it’s own type of Offset Account and Redraw Facility which have their own advantages and disadvantages which will come down to your personal situation.

Talk to one of our mortgage brokers calling us on 1300 088 065 or complete our free assessment to find out more details and see if an Offset Account is a good fit for you.

Ready to take the next step toward buying? We’re happy to help. Schedule a call today with a Home Loan Expert from Hunter Galloway, the home of home buyers.