What is an offset account and how can it save you money on your home loan?
An offset account is a savings or transaction account linked directly to your home loan. The balance in this account reduces the amount of your mortgage that accrues interest. Essentially, the more money you have in your offset account, the less interest you pay on your home loan.
For example
- mortgage balance: $400,000
- offset account balance: $50,000
- interest is only calculated on $350,000, not the full $400,000.
This simple mechanism allows you to save on interest without making extra repayments on your mortgage.
How does an offset account work?
Interest on home loans is typically calculated daily and charged monthly. The balance in your offset account is subtracted from your loan balance when calculating daily interest.
Daily interest calculation example
- mortgage interest rate: 5% p.a.
- loan balance: $400,000
- offset account balance: $50,000.
Interest charged without offset
$400,000 × 5% ÷ 365 = $54.79 per day.
Interest charged with offset
($400,000 – $50,000) × 5% ÷ 365 = $47.95 per day
Daily savings: $6.84
Yearly savings: $2,497.20
Even a modest balance in your offset account can result in significant savings over the life of your loan.
How can an offset account save you money?
- reduces loan interest: since interest is calculated on the reduced loan balance, you pay less in total interest over the life of your loan
- helps you pay off your loan faster: by saving on interest, more of your regular repayments go toward reducing the loan principal. This helps you own your home outright sooner
- tax-free savings: unlike traditional savings accounts where earned interest is taxed, the interest saved with an offset account is effectively tax-free
- flexibility and accessibility: funds in your offset account remain accessible for everyday use, giving you financial flexibility while still saving on your mortgage.
What types of offset accounts are available?
Full offset account
- 100% of the balance offsets your loan
- most effective for saving on interest.
Partial offset account
- only a portion of the balance offsets your loan
- typically found with fixed-rate loans.
Fixed and variable loan offset accounts
- variable-rate loans commonly include offset accounts
- some fixed-rate loans may offer partial offset functionality.
How much can you save with an offset account?
Example scenario:
- loan amount: $400,000
- interest rate: 5% p.a.
- loan term: 30 years
- offset account balance: $20,000 maintained throughout the loan.
Savings over the loan term
- interest saved: $46,000
- loan term reduced by: 11 months.
If you increase your offset account balance or deposit regularly, your savings grow significantly.
How to maximise savings with an offset account
- deposit regularly: direct your salary into the offset account to maximise the balance daily
- combine with a budget: use a budget to ensure you’re saving consistently and managing expenses wisely
- avoid withdrawals when possible: keep funds in your offset account for as long as you can to maximise interest savings
- use MyBudget’s expertise: let MyBudget help you free up money for your offset account by creating a personalised financial plan.
Offset account vs. extra repayments
Both offset accounts and extra repayments save money on your mortgage, but they work differently:
| Feature | Offset account | Extra repayments |
|---|---|---|
| Accessibility | Funds remain accessible anytime | Funds are locked in the loan |
| Flexibility | Can be used like a transaction account | Requires discipline to make extra repayments |
| Interest Savings | Saves interest daily | Reduces interest by lowering principal |
| Goal | Ideal for flexibility | Better for committed debt reduction |
Who should use an offset account?
An offset account is ideal if you
- want to save on interest while keeping your money accessible
- can consistently maintain a high balance in the account
- prefer flexibility for unexpected expenses or emergencies.
How MyBudget Can Help?
Maximising the benefits of an offset account requires smart money management. MyBudget can:
- create a budget: ensure you can maintain a healthy balance in your offset account
- automate savings: set up systems to regularly deposit funds into your account
- provide expert guidance: help you decide if an offset account suits your financial goals.
Enquire about a Personal Budgeting Solution.
Start saving today
Ready to make your mortgage work for you? Use MyBudget’s free Home Loan Repayment Calculator to see how an offset account can reduce your interest payments.
For personalised budgeting support, book a free consultation or call us today on 1300 300 922 and let us help you achieve financial freedom faster.