Mortgages

How does an offset account work? Q&A explainer

Toni Mladenova
Jun 23, 2022
Yard Financial Pty Ltd | ACN 623 357 513 | Australian Credit Licence 509481

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Interested in an offset account but not sure how they work?

If you are researching home loans or are looking to refinance you could have come across offset accounts, but are unclear what their benefits are and if they suit your financial circumstances. You may also have seen them referred to as a home loan offset account, mortgage offset account or mortgage offset facility.

Read our Q&A for answers to common questions like:

  • What is an offset account?
  • How does an offset account work?
  • How much can an offset account help me save?
  • What are the pros and cons of an offset account?
  • What is the difference between an offset account and a savings account?
  • What is the difference between an offset account and a redraw?

Let’s start by defining an offset account.

What is an offset account?

An offset account is a separate everyday transaction account that your lender links to your home loan account. It gives you the flexibility to offset your savings against the outstanding loan balance on your home loan, which reduces the amount of interest you get charged. This could help to pay off your loan quicker. 

There are two types of offset accounts:

  • 100% offset account - where the outstanding balance on the loan can be fully offset by funds in the offset account.
  • Partial offset account - where only a portion of the balance in your offset facility is counted against your mortgage.

Like a transaction account you can deposit your salary and any savings into your offset account, and the account balance ‘offsets’ daily against the total of your home loan. You also have access to all the funds in your offset account at any time, if you need to withdraw an amount.

Tip: Yard offers an optional 100% offset facility on our variable rate home loans, with the ability to access funds held in the account electronically via your internet portal. 

Let’s now look at how they work in practice, with a real-world example.

How does an offset account work?

The easiest way of understanding an offset account is with an example. 

Let’s assume you take a variable rate home loan out for $600,000 to purchase your home. You have $40,000 in savings which you deposit into your offset account. When calculating how much interest you owe, your lender allows your savings to notionally reduce, or ‘offset’, the outstanding loan balance to $560,000 ($600,000 - $40,000 = $560,000). Many lenders do this calculation daily and charge interest once a month.

With a 100% offset facility, there is typically no maximum amount of savings you can keep in the offset account. However, the amount of funds in the offset account cannot exceed the outstanding balance on the loan. If the facility is not 100% offset but a partial offset, there might be a limitation around the amount of funds kept in the offset account.

Wondering how much an offset account could help you save?

How much can an offset account help me save?

You can use our dedicated offset calculator to calculate how much interest you could save by keeping savings in your offset account. Simply input your loan amount, loan term and interest rate. You are then given the option to enter a lump sum that you plan to put in your offset account, and when this balance will be deposited. You can also input regular additional contributions you plan to make to your offset account with the start date.

You also need to be aware of the pros and cons of this product, so you can decide if it suits your circumstances. 

What are the pros and cons of an offset account?

Offset accounts are popular, and for good reason - with a range of benefits for the account holder, specifically:

  • Reduces the interest payable on your home loan by using your savings balance to offset your home loan amount.
  • Helps to reduce the overall term of the loan.
  • Gives you the flexibility to access the funds in the account while minimising the amount of interest you pay on your loan. 
  • You will not be taxed on the interest you save, unlike the interest you earn on a savings account.

You also need to be aware of the following features of an offset account, before you sign up:

  • There could be a fee attached to an offset account.
  • Offset accounts are typically not available on fixed rate mortgages.
  • There could be limits to the type of transaction you can make in an offset account.

You may also be wondering if there is a difference between an offset account and a savings account.

What is the difference between an offset account and a savings account?

The main difference between an offset account and current account is that an offset account gets linked to a home loan. The offset account does not earn interest, like a regular savings account would do. However, keeping your savings in an offset account could be more beneficial than a savings account as the interest rate you pay on your home loan is likely to be higher than the interest you would earn on a savings account. 

You also may have read about redraw and wanted to know how it compares to an offset facility. 

What is the difference between an offset account and a redraw?

A redraw facility is also a feature typically attached to a variable rate home loan that enables you to reduce the amount of interest payable on your mortgage. With redraw, you get the ability to make additional repayments to your home loan account and then withdraw these funds at a later date. The payments go directly toward reducing the principal or loan amount. It is less flexible than an offset account as it is not a separate account and does not allow for everyday transactions, but if you only need occasional access a redraw facility could be worth investigating.

Still have a question about our offset account or anything to do with home loans? Our local team are available to chat at a time that suits your schedule.

Want to learn more?