What is an offset account?
A normal bank account linked to your home loan, where every dollar in it stops a dollar of the loan being charged interest.
The same savings can cut years off a loan, and you can still spend the money.
The rule
- A mortgage offset account is a transaction account linked to your home loan. It is generally available with a variable rate home loan.
- The balance reduces the amount of your loan that is charged interest. With a $750,000 loan and $50,000 in the offset, you are charged interest on $700,000.
- Interest on most home loans is calculated daily. Each day the lender subtracts your offset balance from your loan balance before working out interest.
- An offset is a separate account you can still use. A redraw facility is extra repayments that go onto the loan, and how you get them back depends on the loan terms.
- Some lenders charge for an offset through a higher rate, account fees, or both. The lender decides what it charges, so compare the cost with the interest you expect to save.
- If an offset is not linked properly, the money in it may not count when interest is worked out. In Moneysmart's example, $50,000 on a $750,000 loan at 6.25% that was not linked cost over $3,000 in extra interest in a year. Refinancing can break the link.
- Tax: the ATO's ruling TR 93/6 says these products are generally structured so no interest is derived by the customer, so there is no income tax on the benefit. Interest paid on a credit balance is assessable income.
What people ask
How does a mortgage offset account work?
Money in the account is taken off your loan balance each day before interest is worked out. A $750,000 loan with $50,000 in the offset is charged interest on $700,000. More of each repayment then goes to the loan itself.
Is an offset account worth it?
It can be if you keep a large balance in it for a long time. It may not be if you keep a low balance, the loan has higher fees for the offset, or the rate is higher than a similar loan without one. Compare the fees with the interest you expect to save.
What is the difference between an offset account and redraw?
An offset is a separate account linked to the loan, and you can use your savings whenever you need them. Redraw is extra repayments paid straight onto the loan, which you may be able to withdraw. How and when depends on the loan terms.
Is the interest I save with an offset account taxed?
The ATO ruling TR 93/6 says offset arrangements are generally structured so the customer earns no interest, so there is no income tax on the benefit. If an account pays you interest on a credit balance, that interest is taxed. This page is about a home you live in. The ATO decides how it applies to you.
How do I check my offset account is working?
Check it is linked to the loan, check the savings show in your app or statements, and ask the lender to relink it if you refinance or switch loans.