What is an offset account?

An offset account is a bank account that’s linked with your home loan. Money in your offset account is used to “offset” what’s owing on your mortgage when calculating your interest charges. The more money you deposit into your offset account, the more you can potentially save on home loan interest charges, and the sooner you can potentially pay off your mortgage.

 

Find and compare offset account home loans

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3.03%

Variable

2.70%

UBank

$758

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

1.99

/ 5
More details

2.94%

Variable

3.34%

Newcastle Permanent

$1.4k

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

2.51

/ 5
More details

3.39%

Variable

3.59%

Pepper

$1.5k

Redraw facility
Offset Account
Borrow up to 85%
Extra Repayments
Interest Only
Owner Occupied

1.86

/ 5
More details

2.73%

Fixed - 1 year

3.23%

Adelaide Bank

$683

Redraw facility
Offset Account
Borrow up to 79.9999%
Extra Repayments
Interest Only
Owner Occupied

2.20

/ 5
More details

Learn more about home loans

How does an offset account work?

An offset account works a lot like a typical transaction or savings account. You can deposit, withdraw, or transfer money to and from your offset account as often as you like.

The biggest difference between an offset account and a regular bank account is that any money that you deposit in your offset account is included when your lender calculates the interest charges on your home loan. Your mortgage principal (the balance you owe on your home loan) will be effectively reduced by the same amount as the current balance deposited in your offset account.

As most lenders calculate mortgage interest daily, based on your loan’s current principal, the more money you can deposit in your offset account, and the longer you can keep it there, the less you may be charged in home loan interest.

Some lenders offer 100 per cent offset accounts, where the full account balance is used to offset your home loan’s outstanding principal. For example, if you had $10,000 saved in a 100 per cent offset account, your mortgage principal will be offset by $10,000.

However, some lenders instead offer partial offset accounts, where only part of the balance is used to offset your home loan. For example, if you had $10,000 saved in a 40 per cent offset account, you home loan would only by offset by $4000.

Can an offset account lower my minimum monthly mortgage repayments?

While it may sound like using an offset account to reduce the interest charges on your home loan repayments should mean you’ll pay less onto your mortgage each month, this is more often the exception than the rule.

It’s much more common that you’ll keep paying the same amount onto your home loan each month, with a higher percentage of each repayment going towards paying off your home loan’s principal. These extra repayments may help you clear your mortgage debt faster, exit your home loan sooner, and pay less interest on your loan in total.

Example:

Imagine you owed $350,000 on a principal and interest home loan with 25 years of remaining. Assuming your interest rate remained at 4 per cent, you’d pay $1,847 per month, for a total of $554,229 – that’s $204,229 in interest charges.

Now imagine that you had an offset account, where you keep an average of $10,000 saved. This means you’d be charged interest on your home loan as if you only owed $340,000.

By continuing to make repayments of $1,847 per month, you could pay off your loan in full 14 months ahead of schedule and pay a total amount (including your offset balance) of $537,691 – that’s an interest savings of $16,538!

This hypothetical example is for illustrative purposes only. The exact amount you may pay on your home loan may vary depending on changes to your interest rate and many other factors.

Is an offset account the same as a redraw facility?

No, offset accounts and redraw facilities are two different types of home loan features, though they can provide similar benefits.

You can pay off your home loan sooner and save money on interest charges by making extra mortgage repayments that directly reduce your home loan’s principal. A redraw facility will give you the option to withdraw these extra repayments from your home loan if you need the money back again.

However, you may need to pay a redraw fee to use a redraw facility. Your lender may also limit how much you can redraw from your loan each time or limit how many redraws you can make per year.

As an offset account works much like a typical bank account, you can deposit, withdraw and transfer money from an offset account whenever you choose. This means an offset account can be a more flexible option than a redraw facility.

What should I watch out for with an offset account?

While you can use an offset account as a savings account (especially if you make regular deposits) an offset account may not provide the same kind of benefits as a dedicated savings account. While a savings account may reward you for saving by letting you earn interest on your savings and grow your wealth, an offset account will instead reward you for saving by letting you pay less interest on your home loan.

Also, the more features and benefits a home loan offers (including offset accounts), the higher the interest rates and/or fees you may have to pay. A home loan with an offset account may have a higher interest rate and/or annual fee than a more basic “no-frills” home loan, so even with the potential interest savings from your offset account, your mortgage could end up costing more. A few lenders may also charge a separate fee for including an offset account with your home loan.  

It’s important to compare the overall cost of a home loan to the value it may offer, so that you can get a better idea of if it may be right for you. Think about how you plan to use your offset account and consider whether the average balance you plan to deposit will be enough to provide more value in savings than what you’ll pay in fees and interest.

Offset account pros and cons

  • Offset your mortgage principal with your savings
  • Pay off your loan faster and save money on interest
  • Easy access to your money if you need it
  • May charge higher fees
  • Doesn’t offer wealth growth through earning interest
  • Interest savings may not provide more value if starting rate is higher

Frequently asked questions

How does an offset account work?

An offset account functions as a transaction account that is linked to your home loan. The balance of this account is offset daily against the loan amount and reduces the amount of principal that you pay interest on.

By using an offset account it’s possible to reduce the length of your loan and the total amount of interest payed by thousands of dollars. 

Example: If you have a mortgage of $500,000 but holding an offset account with $50,000, you will only pay interest on $450,000 rather then $500,000.

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

What is the difference between offset and redraw?

The difference between an offset and redraw account is that an offset account is intended to work as a transaction account that can be accessed whenever you need. A redraw facility on the other hand is more like an “emergency fund” of money that you can draw on if needed but isn’t used for everyday expenses.

How can I pay off my home loan faster?

The quickest way to pay off your home loan is to make regular extra contributions in addition to your monthly repayments to pay down the principal as fast as possible. This in turn reduces the amount of interest paid overall and shortens the length of the loan.

Another option may be to increase the frequency of your payments to fortnightly or weekly, rather than monthly, which may then reduce the amount of interest you are charged, depending on how your lender calculates repayments.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.