What is an offset account?
An offset account is a type of savings or transactional account attached to your home loan. The balance of your offset account effectively offsets your outstanding home loan balance, which in turn reduces the interest you owe.
How does an offset account work?
Attaching an offset account to your home loan means you are charged interest on your mortgage minus the balance of the offset account.
For example, if you owe $500,000 on your loan and you have $15,000 saved up in your offset account, you will only be charged interest on a $485,000 loan.
You can access the money in your offset account at any time, just like you would with a standard savings account. However unlike a savings account, offset accounts do not earn any interest.
With interest on your home loan calculated daily, your interest savings will change depending on how much you deposit and withdraw from the account.
How much does an offset cost?
Offset accounts are usually considered an ‘extra’ feature to your home loan, meaning most lenders will charge an annual fee to use one. The cost varies from bank to bank, with a typical fee ranging between $300 and $500.
Lenders might also offer home loan bundles that package offset account fees into the cost of the loan.
Because offset accounts aren't generally free, you will have to calculate whether the savings on interest outweigh the costs associated with having the account. This will largely be determined by the interest rate on your mortgage and how much you have inside your offset account.
Is it worth getting an offset account?
If you already have a significant sum of money sitting in a savings account, there’s a good chance that moving it into an offset account will be more beneficial. Mortgage interest rates almost always exceed interest on a savings account, meaning that offsetting the interest on your mortgage will likely save you more in the long run.
The greater the balance of your offset account, the less you will ultimately have to pay in interest.
If you can avoid the temptation of spending your accessible savings, then an offset account could be a great idea. For couples who contribute dual incomes towards the mortgage, building up a savings whilst making the repayments might be an achievable goal.
But if you can’t keep your hands out of the cookie jar, an offset account may end up costing you more than it is saves. The effectiveness of this strategy will come down to your discipline with money and your level of disposable income.
When done properly, offset accounts have the potential to save you thousands of dollars on daily interest costs over the duration of your mortgage.
How do I maximise my offset account?
It’s pretty simple; save as much as you can.
Continue to plan out your savings strategy and forecast any big expenses you might need to make in the future. Make sure you continue to save up beyond just your mortgage repayments and do your best to avoid unnecessary spending.
Here are some ways that will help you make the most of your offset account:
- Put any money you have aside into the offset account, as well as any additional savings you make in the future.
- Set up a budget to stay in control of your spending.
- Have your salary deposited into the offset account, as well as any bonuses or lump sum payments you receive.
- Check for hidden fees and costs associated with the account.
- Use a credit card with an interest free period for daily expenses to keep your money in the offset account longer. Note, this strategy only works if you can be trusted to pay off your credit card debt on time. Unpaid credit card debt attracts much higher interest rates than your mortgage will, so don’t let this strategy backfire on you.
It can be harder to keep track of spending when all your money is wrapped up in the one offset account, so staying organised is your best chance at success.
If you need more information on offset accounts, seek advice from your mortgage broker or other trusted professionals.