You can deposit and withdraw funds just as you would with a standard account, while your balance quietly works in the background.
How does it work?
An offset account reduces the amount of your home loan that interest is calculated on.
For example:
If you have a home loan of $250,000 and $10,000 in your offset account, you’ll only be charged interest on $240,000 of your loan.
If you then withdraw $2,000 and your balance drops to $8,000, interest will be calculated on $242,000 instead.
Interest on most home loans is calculated daily and typically charged monthly (though this can vary by lender), so even small amounts sitting in your offset account can make a difference over time.
Why it can be so effective
Because the offset account acts like an everyday account, your money stays accessible whenever you need it. At the same time, it’s reducing the amount of interest you pay on your loan.
How you can use an offset account
People use offset accounts in different ways depending on their situation. Some common approaches include:
- Having your salary paid directly into the offset account
- Using it as your main everyday spending account
- Setting aside savings for holidays, renovations, or emergencies
- Holding funds for upcoming expenses like tax bills
The more money you keep in the account, and the longer it stays there, the more interest you’re likely to save.
Offset vs redraw – what’s the difference?
An offset account is often confused with a redraw facility, but they work differently.
With an offset account, your savings sit in a separate account and reduce the interest on your loan.
With redraw, any extra repayments go directly into your loan. You may still be able to access those funds later, but they are not held separately.
Things to remember
Before deciding if an offset account is right for you, it’s worth keeping a few key points in mind:
-
Many lenders charge for offset accounts
This may be a monthly fee or an annual package fee if it’s part of a home loan package. -
Compare the overall cost
It’s important to weigh up the interest savings against any fees and also compare the loan’s interest rate with and without an offset feature. -
You won’t earn interest on the balance like a savings account
Instead, the benefit comes from reducing the interest charged on your home loan. -
Not all offset accounts are the same
Some loans offer a full offset, while others only offset a portion of your balance. -
Offset accounts are usually linked to variable loans
Some lenders offer limited or partial offset options on fixed rate loans, but these are less common. -
They work best with consistent balances
The more money you keep in the account over time, the more benefit you’ll generally see.
A simple way to make your money work harder
An offset account can be a practical way to reduce the interest on your home loan without locking your money away. It gives you flexibility while helping you chip away at your loan more efficiently.
Like any financial product, it’s not one-size-fits-all, but with the right setup, it can be a useful tool for many homeowners.
Please note: Information provided is general in nature and does not take into account your personal objectives, financial situation or needs. It is not intended to influence decisions about banking products. You should seek your own professional advice before making any financial decisions
Sources:
moneysmart.gov.au
ato.gov.au
rba.gov.au
