An offset account is an everyday transaction account linked to your mortgage that can help borrowers reduce the interest charged on their mortgage and potentially pay off their loan sooner.
This feature is typically only offered on variable-rate home loans, although some lenders offer it on selected fixed-rate mortgages.
How does a mortgage offset account work?
The balance in the mortgage offset account can be used to offset your loan balance; you will be charged interest only on the difference.
For example, if you owed $600,000 on your mortgage and had $40,000 in your offset account, interest would be charged on $560,000. This would allow you to pay off your mortgage faster, as a smaller share of your repayments would be allocated to interest and a larger share to paying down your principal.
As with a regular transaction account, you can deposit and withdraw money from offset accounts whenever you choose; the more money held in it, the less interest you will owe.
Some lenders may even allow you to have more than one offset account, so you can separate savings and money used for daily transactions.
It is important to note, however, that offset accounts can carry additional fees that may reduce the cost-savings benefits. Furthermore, not all offset accounts are the same, so it is advisable to understand each lender’s offer.
The advantages of offset accounts
- Potential to save money on interest.
- Flexibility to make extra repayments and potentially reduce your loan term.
- Easy access to your money.
The disadvantages of offset accounts
- Additional fees (generally).
- Higher mortgage interest rates (possibly).
- Need more than minimal savings to achieve benefits and justify fees/charges.
Offset accounts vs redraw facilities
Another feature that comes with some home loans is a redraw facility; it is not a transactional account, but a facility within your loan account.
A redraw facility also allows you to make extra payments on your loan, reducing the amount of interest owing. However, while you are able to access these funds, availability may not be as immediate as with an offset account. That’s because the money you pay into redraw is regarded as an extra repayment on your mortgage and therefore returned to the lender (whereas money in offset is your own cash sitting in a linked transaction account).
Withdrawing money from redraw may also have tax consequences, given that, technically, you’d be borrowing back the lender’s money (whereas, with offset, you’d be withdrawing your own money).
If your home loan offers offset accounts and redraw facilities, you can choose to make use of one, both or neither; your decision will depend on your financial circumstances and goals.
