What is an offset account and how does it work?

Offset accounts can be linked to either a variable-rate home loan or a fixed-rate home loan for owner-occupiers or for investors. Linking to either principal-and-interest loans or interest-only loans is also available. Some lenders also allow offset accounts for other types of loans, such as personal loans.

It’s up to the lender to decide whether or not to offer offset accounts with home loans and different lenders can have different terms. For example, some home loan lenders may stipulate that the offset applies for a fixed term, such as a 100% offset against a 2-year fixed rate loan.

If you’re thinking about using an offset account with your home loan, there are a number of potential advantages:

• Reduction of interest – because you’re only paying interest on part of your loan balance, your interest payable is lower
  
  
• Shortening the length of your loan term – paying less interest may mean you can pay more than your minimum repayments and pay off your loan faster
  
  
• Easy access to saved money if you need it – having savings offers an additional level of financial security if you run into unexpected expenses
  
  
• Managing your finances through one bank – handling your home loan account and bank accounts through the one bank can make it easier to stay on top of your finances.

The type of offset account – there are two main types of offset account:
 

• 100% offset - offsets your mortgage by the entire balance of your offset account, whereas a
  
  
• Partial offset account - only offsets your mortgage by a portion of the balance.

For example, a 50% offset account only offsets your mortgage principal by 50% of your offset account balance. In other words, the higher the percentage of your offset account, the more you will save on interest.
 

Fees – keep in mind that some offset accounts come with transaction fees and/or account-keeping fees.
 

Balance limits – some lenders limit the amount you can deposit into your offset account.  You will only get the offset benefit on the amount up to the account limit or the amount of the connected loan. Surplus funds over this amount have no benefit and earn no interest. 
 

Allowable transaction types – consider the types of transactions that are allowed on your offset account, such as debit card, ATM, EFTPOS, BPAY®, direct debit, and in-branch.
 

Refinancing a loan with an offset account - take extra care when refinancing between financial institutions to ensure the offset account is set up correctly. A refinance could take 3-4 weeks to process so if you have a large dollar value in your offset make sure the transfer of funds is managed so you maximise you benefit.