What is an Offset Account?

An Offset Account is technically a savings account linked to your mortgage / home loan and is works as a strategy to help pay down your debt sooner.

How does an Offset Account work?

The way that an offset account works is that the balance of the funds in the account ‘offsets’ the balance of your mortgage. The interest applicable on your mortgage is based on the balance of your mortgage less your offset account balance. This helps reduce interest applicable on your loan and ensures that a higher portion of your mortgage repayments are directed to reducing your principal.

Is it worth having an Offset Account?

An offset account usually is beneficial compared to a savings account as the interest payable on your home loan is usually higher than interest received from a savings account. Furthermore, interest derived in a savings account will be subject to income tax.

Funds within an offset account can still be utilised for day to day expenses.

For Example

Assume you have a mortgage of $500,000 with an interest rate of 5% pa. You are making mortgage repayments of $35,000 pa. You have saved well over the past few years, and your savings account’s balance is $100,000. The interest rate on your savings account is 2.50% pa.

In reviewing your repayments of $35,000 pa, $25,000 pa would be the interest paid, and $10,000 pa would be the principal (i.e. reducing your loan). In reviewing your savings account, you derive $2,500 pa in interest (before tax).

However, you now set up an offset account with your mortgage provider and have directed your savings account of $100,000 into your offset account. Now considering this, your home loan repayments of $35,000 pa have not changed, however, the interest and principal repayments would change as interest is calculated on $400,000 (i.e. $500,000 less $100,000 = $400,000). Effectively, your repayment’s interest portion will reduce to $20,000, and the principal portion of your repayment will increase to $15,000.