What is an offset account?

What you’ll learn

 

• What is an offset account?
• How an offset account works
• The pros and cons of an offset account
• Different types of offset accounts
• Redraw vs. offset – What’s the difference?
• How much does an offset account cost?

 

 

What is an offset account?

An offset account is a type of bank account linked to your home loan.

The account’s balance is offset against the amount you owe on your home loan. This means you’re only charged interest on the difference. The more money you have in your account the more it reduces the interest you pay on your home loan.

Offset account features

It has the same features as an everyday transaction account and works in a similar way.

You can withdraw and deposit funds at any time. You can even get your salary paid straight into your offset account. You can also get a debit card and make ATM withdrawals from this account.

The big difference is, when your bank calculates interest charges, the money in your offset account balances against the amount you still owe on your home loan. This means that your bank only charges you interest on your home loan balance, minus the amount you have in your offset.

Because of this an offset account can lead to savings on interest over the life of your loan. Making it a smart financial strategy for homeowners looking to minimize their mortgage costs. 

How an offset account works

Your home loan balance is made up of two things:

• The principal – the amount of money you borrow
• Interest charges – the interest you pay on the principal, which is calculated daily and then added up and charged to your home loan balance monthly.
   

The funds you keep in an offset account balance against the whole amount you still owe on your loan – which includes both the remaining principal and the interest charged on it. This means you pay less and less in interest charges the more you keep in your offset.

That’s why it’s a smart idea to keep any savings in an offset account. Over time, it could potentially save you thousands of dollars and help you pay your home loan off quicker.

How much interest could you save with an offset account?

Use our offset calculator to see how much you could save over the life of your loan.

 

The pros and cons of offset accounts

There are a few things to consider when deciding if an offset account is right for you:

Potential benefits

1. Reduce interest

The main benefit of an offset account is the ability to reduce the amount of interest you pay on your home loan.

2. Tax saving

There may be tax benefits. Any interest savings you make from having money in your offset account aren’t taxed – as it’s not counted as income. On the other hand, interest earnings from savings accounts are usually taxable.¹

3. Access to your money

While your offset account is helping you reduce home loan interest charges, your money isn’t locked up. You can use it as an everyday account and have access to the funds anytime. So, if you need an extra bit of cash for a home renovation or a quick trip away, or even just to pay your grocery bills, you can use your offset account. Don’t forget though, as your balance reduces in your offset account, the interest saving will also be reduced.

4. Save over time

It’s also worth knowing that you don’t earn interest in a mortgage offset account as you would in a savings account. But what you’ll save on interest repayments over the life of your home loan, may be more than you’d earn in a savings account. For example, you can earn up to 0.25% p.a. on funds kept in a Westpac Life account, whereas you could save 4.58% p.a. in interest charges on the same funds if you kept them in an offset account attached to a Rocket Repay home loan (rates current as of 02/12/21).

Potential disadvantages

1. Fees

It’s possible that you could find yourself paying a higher establishment or monthly maintenance fee for a loan with an offset account. The offset account itself might also come with its own monthly account fee. It’s worth noting that these fees are waived at Westpac if you choose the Premier Advantage Package with your home loan (a $395 Annual Package fee applies)^#. A home loan that has offset as a feature, may additionally come with a higher interest rate than one without offset.

2. Availability

Offset accounts are usually linked to variable rate home loans. At Westpac, we don’t offer offsets on fixed rate home loans, but most offer a redraw facility.

Different types of offset accounts

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

 100% offset account – all the money in your account is offset against the home loan

 Partial offset account – only a percentage of your account balance is offset against the home loan

Here’s an example of how they differ:

 

 

At Westpac, we offer a 100% offset account on our Rocket Repay variable rate home loan.

Redraw vs. offset – what’s the difference?

A redraw facility is different to an offset account. A redraw facility is a home loan feature that can be added to some home loan accounts. While both enable you to make extra repayments and access this money at a later date if you need to, there is a difference in how you deposit and access the extra funds.
 

If you want to access money from a redraw facility, you’ll need to transfer the funds into a transaction account. With an offset account, you can access the funds directly.

Which is best for you depends on your personal circumstances and any extra interest or fees you may need to pay for using it. Both can help you pay off your home loan faster.
 

Some lenders, like Westpac, offer home loans where you can have a redraw facility and an offset account, so you can enjoy the best of both worlds.
 

You could use your offset account like an everyday transaction account, to receive your salary and pay bills. A redraw facility can be used to make regular deposits and less frequent withdrawals, like paying for renovations.

Read more about the difference between redraw and offset.

Offset account costs

The financial benefits of an offset account can vary. You may find you pay a higher interest rate and more fees on a home loan that comes with an offset account. It’s important to weigh these factors against the amount you’re likely to keep in your offset when considering if this type of feature could help you.

Australian home buyers can have an offset account, redraw facility, or a mixture of both on their home loan. To decide which option works best for your financial situation, you’ll need to do those calculations and check the comparison rate of different loans.

To sum up

• An offset account can reduce the amount of interest you pay on your home loan
  
• Use it like an everyday bank account
• Have unlimited access to your money
• Not available on some types of home loan