What Is an Offset Account and How Does It Save You Interest?

Ever ask yourself the question, what is an offset account and how does it work? When looking for ways to reduce your mortgage costs, an offset account can make a significant difference. This financial tool helps homeowners pay less interest while maintaining easy access to their savings. Let’s explore how offset accounts function and how they can benefit you.

What Is an Offset Account?

So, what is an offset account? An offset account is a transaction account linked to your home loan. Instead of earning interest like a traditional savings account, the balance in this account offsets your loan balance. This means you only pay interest on the difference between your mortgage amount and the funds in your offset account.

For example, if you have a home loan of $500,000 and $50,000 in your offset account, you’ll only be charged interest on $450,000. The more you keep in your offset account, the more you can save on interest over time.

How Does an Offset Account Work?

Now, how does an offset account work? An offset account works by reducing the interest calculated on your mortgage. Unlike making extra repayments directly into your loan, which may not always be accessible later, an offset account allows you to withdraw your funds when needed while still reducing the interest payable on your loan.

Most offset accounts are linked to a variable-rate home loan, however, some lenders do offer offset accounts with fixed-rate loans, but usually with restrictions. Some lenders offer partial or 100% offset options. A 100% offset account means every dollar in your account reduces your loan balance, while a partial offset account applies a lower interest rate reduction based on a portion of your balance.

Benefits of an Offset Account

Using an offset account effectively can help homeowners save thousands of dollars in interest over the life of their loan. Some benefits that come with an offset account include:

• Lower Interest Costs – Since the balance in your offset account reduces your loan principal, you pay less interest.
• Flexibility – Unlike making direct loan repayments, you can still access your funds if needed.
• Potentially Faster Loan Repayments – By reducing your interest payments, more of your mortgage repayment goes toward paying off the principal, helping you become mortgage-free sooner.
• Tax Efficiency – Unlike interest earned from a savings account, the savings from an offset account are not considered taxable income.

Types of Offset Accounts

There are different types of offset accounts. Choosing the right one depends on your financial goals.

• Full Offset Account – This reduces your loan interest by 100% of the balance in your offset account.
• Partial Offset Account – Only a portion of your account balance offsets the loan balance, meaning the interest savings may not be as significant.
• Multiple Offset Accounts – Some lenders allow multiple offset accounts linked to one home loan, providing flexibility for different financial goals.

Things to Consider Before Opening an Offset Account