How an offset account works
Your loan balance stays the same, but interest is worked out on the balance minus what's in your offset. Your salary goes in, you spend from it as normal, and whatever sits there in the meantime is saving you interest.
An example. With a $600,000 loan and $50,000 in a 100% offset, you're charged interest on $550,000. At a 6% rate, that's about $3,000 a year less interest, and because it's interest saved rather than interest earned, it isn't taxed.
Offset versus redraw
- Offset. A separate account. Money goes in and out freely, and it never becomes part of the loan.
- Redraw. Extra repayments you've made into the loan that you can take back out. It saves the same interest, but access can be slower, some lenders limit it, and the lender can restrict it in some situations.
- The tax difference. If your home might become an investment property later, money in an offset can be moved out without changing the loan. Money redrawn from the loan for another purpose can complicate what's deductible. Ask your accountant before you choose.
Is an offset worth the fee?
Offsets often come with a package that costs around $400 a year. As a rough guide, the package pays for itself if you keep enough in the offset, along with any rate discount the package brings. If your savings are small, a basic loan with redraw and a lower rate can come out ahead. I'll compare both.
Things to check
- Whether the offset is 100% or partial
- Whether you can have more than one offset account, which helps with budgeting
- Whether the offset works with a fixed rate. Many lenders limit or exclude this
- The package fee, and what else the package includes
Questions people ask
How does an offset account work?
The balance of the offset is subtracted from your loan balance before interest is calculated, so you pay less interest while keeping access to your money.
Is an offset better than a savings account?
Usually, if your loan rate is higher than the savings rate after tax. Interest saved isn't taxed, while savings interest is.
Can I have an offset on a fixed rate loan?
Some lenders allow it, often with limits. Many people split the loan so the variable part has the offset.
Offset or redraw for an investment property?
An offset usually keeps things cleaner for tax, but get advice from your accountant on your situation.
What are the downsides of an offset account?
The package fee, a rate that can be slightly higher than a basic loan, and the temptation to spend what's sitting there. If your balance is small, it may not pay for itself.
