Offset Accounts: Making Your Money Work While It Waits

Photo by Andre Taissin on Unsplash

Most of us have money that spends at least some of its life waiting. Your salary arrives before the mortgage payment is due. Money accumulates for rates, insurance or a holiday. There might be an emergency fund sitting there that you hope you won't need. Or perhaps you are simply building up savings over time. An offset account can give that money something useful to do while it waits.

What is an offset account?

An offset account is a transaction account linked to your home loan. The balance in the account is used to reduce the amount of your loan on which interest is calculated.

For example, if your home loan balance is $500,000 and you have $50,000 sitting in a 100% offset account, interest would generally be calculated on $450,000 rather than the full $500,000.

You haven't actually reduced the loan balance by $50,000. The money is still sitting in your account and, subject to the terms of the account, remains available to you. But while it is there, it is helping to reduce the interest being charged on your home loan.

That's the attraction of an offset account: your money can remain accessible while still doing some work.

The benefit isn't just how much you have — it's how long it stays there

It's easy to think an offset account is only worthwhile if you have a large amount of savings. That's not necessarily the case. Interest on most home loans is calculated daily. So money sitting in an offset account can potentially reduce interest for every day it remains there. This is why some borrowers choose to have their salary paid directly into their offset account and use it as their everyday transaction account. Money comes in, bills and expenses go out, but whatever balance remains in the account continues to offset the home loan along the way. The larger the balance and the longer it remains there, the greater the potential interest saving. Conversely, if the account regularly sits close to zero, the benefit may be relatively small.

An offset account is still your money

Unlike making an additional repayment directly into your home loan, money held in an offset account generally remains readily accessible. Depending on the account and lender, you may be able to:

• have your salary and other income paid directly into the account

• pay bills and everyday expenses from it

• use a debit card linked to the account

• transfer money in and out as required

• keep savings or an emergency fund there.

  
  

That flexibility can make an offset account useful for people who want their cash to reduce home loan interest without necessarily committing that money permanently to the loan. But flexibility has another side to it:

money that is easy to access is also easy to spend.

An offset account works particularly well when it becomes part of the way you manage your money, rather than simply being another transaction account with a different name.

Offset versus redraw

Offset accounts and redraw facilities can produce a similar immediate result: both can reduce the interest you pay on your home loan. But they achieve it differently.

With an offset account, your money remains in a separate transaction account and the balance is taken into account when calculating interest on the linked loan. With redraw, you have made additional repayments directly into the home loan. A redraw facility may then allow you to access some or all of those additional repayments later, subject to the lender's terms and conditions.

That distinction can matter.

Access to redraw may be subject to minimum amounts, transfer requirements, lender policies or other restrictions. An offset account generally operates much more like an ordinary bank account. There can also be different taxation consequences associated with withdrawing money from an offset account compared with redrawing additional loan repayments, particularly if the property is, or may later become, an investment property. Tax outcomes depend on individual circumstances, so appropriate tax advice should be obtained where relevant.

Is an offset account always better?

Not necessarily. Home loans offering offset accounts may have different interest rates, fees or package costs from simpler loan products. Some accounts offer a 100% offset, while others may only provide a partial offset. The way an offset operates can also differ between lenders and loan products.

The real question therefore isn't simply:

"Can I get an offset account?"

It is:

"Will I use it in a way that makes it worthwhile?"

Someone who consistently keeps a meaningful balance in an offset account may potentially save considerably more in interest than the additional cost of having the facility. Someone whose account balance rarely gets very far above zero may receive much less benefit.

The loan structure, interest rate, fees, expected account balance and the way you actually manage your money all need to be considered together.

A useful account — when it suits the way you live

An offset account isn't a clever trick that makes mortgage interest disappear. It is simply a structure that allows money you already have to reduce the amount of your home loan on which interest is calculated.

And sometimes the best financial structures are the simple ones. Your salary arrives. Your savings accumulate. Your emergency money waits for an emergency that hopefully never happens. In the meantime, that money may be helping to reduce the interest on your home loan.

If you're considering a new home loan, refinancing an existing loan or wondering whether you're getting enough value from your current offset arrangement, we can help you compare the available options and understand how the different loan structures may work in your circumstances.