Offset Accounts Explained: How to Save Thousands on Your Mortgage

An offset account is one of the most powerful tools for paying off your mortgage faster - yet many borrowers don't fully understand how it works. Here's everything you need to know about offset accounts and how they can save you thousands.

What Is an Offset Account?

An offset account is a transaction account linked to your home loan. The money in this account "offsets" your loan balance, meaning you only pay interest on the difference.

Real Savings: The Numbers

The impact of an offset account grows dramatically over time. Here's what you could save on a $600,000 loan at 6.5% interest over 30 years:

Offset Account vs Savings Account

Many people wonder whether they should keep money in an offset account or a high-interest savings account. Here's why offset usually wins:

Because the interest you save in an offset account isn't considered income, it's not taxed. A savings account earning 5% actually only gives you around 3.15% after tax (if you're in the 37% bracket).

Offset Account vs Redraw Facility

Both offset and redraw help you save interest, but there are key differences:

Offset Account

• Separate transaction account linked to your loan
• Money remains yours - not part of the loan
• Instant access via debit card and transfers
• Better for investment properties (maintains tax deductibility)
• Usually comes with a small annual fee

Redraw Facility

• Extra repayments go directly into the loan
• Money becomes part of the loan balance
• May have limits on how much you can redraw
• Lender can restrict access in some cases
• Usually free

Maximising Your Offset Account

To get the most benefit from your offset account:

1. Use It as Your Everyday Account

Have your salary paid directly into your offset account. Even though you spend money throughout the month, every dollar sitting there (even for a few days) reduces your interest.

2. Park All Savings There

Emergency fund, holiday savings, car fund - put it all in offset. You can still mentally allocate the money for different purposes while it works to reduce your mortgage.

3. Time Your Bills Strategically

If you have flexibility, pay bills just before they're due rather than early. This keeps money in your offset longer.

4. Consider Multiple Offset Accounts

Some lenders let you link multiple offset accounts (up to 99 with some banks). This helps you organise savings for different goals while all of it offsets your loan.

When Offset Accounts Don't Make Sense

Offset accounts aren't always the best choice:

• Small loan balances: The annual fee may outweigh savings if you have less than $10,000 in savings
• Fixed rate loans: Most fixed loans don't allow full offset (some offer partial offset)
• Minimal savings: If you can't maintain a meaningful balance, the fee isn't worth it

Offset Accounts for Investment Properties

For investors, offset accounts have a special advantage. When you keep money in offset (rather than paying extra into the loan), your loan balance stays higher - meaning more interest to claim as a tax deduction.

If you later want to use those savings for another purchase (like your own home), the money is clearly separate from the investment loan, keeping the tax deduction intact.

Finding the Right Offset Account

When comparing home loans with offset accounts, check:

• 100% offset: Some loans only offer partial offset
• Annual fee: Usually $200-400 per year for package loans
• Transaction features: Debit card, BPAY, transfers
• Multiple accounts: Can you link more than one?
• Minimum balance: Some require minimum amounts