What is an offset account?

An offset account is one of the most powerful ways to save you hundreds of thousands of dollars over the lifetime of a mortgage.

A ‘100 per cent offset account’ can sound too good to be true.

But these accounts enable you to have every cent of your money working to reduce your mortgage rather than sitting idly in your transaction or savings account.

If you put as much of your spare change as you can into an offset account and keep it there for as many days as possible each month, your home loan repayments can be reduced as your savings are bringing down the interest incurred and in effect ‘offsetting’ the cost of the loan.

How does an offset account work?

Imagine if every dollar you had was linked through your everyday transaction account to offset your mortgage balance. You could be saving interest each day you hold that money in your offset account. Your mortgage will no longer be calculated on your full debt. It becomes calculated on your debt minus any offset funds you have accumulated.

Start with your wage

This will transform the way you save your money, even for those who find it hard to save. If you send your wage directly into your offset account, the money you earn is immediately reducing the interest you pay on your home loan – even if you end up spending some of that money over the cycle of a month.

Say you get paid on the 15th of the month, but your mortgage repayment cycle is on the 28th of each month. You could save the difference in interest on the amount in your account for all the days in between this period every month. In the long term this can add up to thousands.

Calculate offset account mortgage savings

The savings you can squeeze from an offset account will be different for everyone depending on their savings regime. However, if you had $15,000 sitting in an offset account for the life of a $350,000 loan, you could save more than $47,000 and pay off your loan more than 2 years sooner (calculated on 5 per cent interest over a 30 year loan).

Why use an offset account

An offset account can help when you are not in a position to pay lump-sum repayments into your loan. You may have savings you are gradually using for renovations, or your savings account might be your annual holiday fund.

Using an offset account is like getting your home loan interest rate as a percentage return on your savings. With interest calculated daily, the longer you can leave money untouched, the better off you’ll be.

What you should know

There are some home loans available that allow you to have multiple offset accounts which can be a great way to really maximised your interest savings but also keep your money separate for things such as savings for a holiday, or even your bills account.

Not all offset accounts offer 100% offset, for example some may offer a 40% offset benefit. This means if you have $10,000 in the account your may only be benefiting on $4,000 of your balance.

Some lenders charge fees and/or higher interest rates on home loans with offset accounts, your broker can help you to figure out if it is worth it for your particular circumstances and anticipated savings.

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Licensing statement: Rayne Finance ABN [70 605 100 838] is authorised under LMG Broker Services Pty Ltd Australian Credit Licence 517192. Disclaimer: (1) As with any financial scenario there are risks involved. This information provides an overview or summary only and it should not be considered a comprehensive analysis. You should, before acting in reliance upon this information, seek independent professional lending or taxation advice as appropriate and specific to your objectives, financial circumstances or needs. This publication is provided on the terms and understanding that: (2) LMG Broker Services Pty Ltd, Rayne Finance (Seed Lending Pty Ltd) and the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication. (3) LMG Broker Services Pty Ltd, Rayne Finance (Seed Lending Pty Ltd) and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to the maximum extent permitted by the law to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication.

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