An offset account is a transaction account linked to your home loan. The money sitting in it is subtracted from your loan balance before the bank works out your interest, so you pay less interest while still keeping full access to your cash.
Quick answer: If you have a $500,000 home loan and $20,000 in a linked offset account, the bank only charges you interest on $480,000. Your repayments usually stay the same, so more of each repayment goes towards the loan itself and you can pay it off sooner. You can read the government’s plain-English guide on Moneysmart’s mortgage offset accounts page.
What is an offset account?
An offset account looks and works like an ordinary everyday bank account. Your salary can land in it, you can pay bills and direct debits from it, and you can use a debit card with it. The difference is that it is linked to your home loan.
Each day, your lender takes your offset account balance off your loan balance and charges interest only on what is left. The money never leaves your hands. It is not paid into the loan, and your loan balance on paper does not change. It just quietly reduces the interest you are charged for every day the money sits there.
Offset accounts are generally available with variable rate home loans. Fixed rate loans often have no offset, or only a partial one, so always check the product terms before you sign up.
How does an offset account work?
Interest on most home loans is worked out daily and charged monthly. Here is a simple example of how the numbers work:
- Your home loan balance: $500,000
- Your offset account balance: $40,000
- Interest charged on: $460,000, not $500,000
At an example rate of 6%, that $40,000 in the offset saves about $2,400 in interest over a year ($40,000 x 6%). The more money you keep in the offset, and the longer it stays there, the more interest you save.
Your scheduled repayment usually does not drop when you use an offset account. That is actually the point: because less of your repayment is eaten up by interest, a bigger share goes towards paying down the loan, so the loan finishes sooner if you keep paying the full amount.
You do not earn interest on an offset account. The return is interest you did not pay, rather than interest you earned, so there is no extra income to declare on your tax return.
100% offset vs partial offset
Not every offset account works the same way, and this is worth checking before you choose a loan:
- 100% offset: Every dollar in the account counts against your loan, dollar for dollar. This is the most common type and the one most people mean when they talk about offset accounts.
- Partial offset: Only part of your balance counts. For example, a 40% offset means $40,000 in the account only offsets $16,000 of your loan. Some fixed rate loans offer a partial offset as a compromise.
If a loan brochure says “offset”, ask whether every dollar counts. A partial offset on a large balance can be much less useful than it first sounds.
Offset account vs redraw facility
Offset accounts and redraw facilities both save you interest, but they work in different ways.
- Offset account: Your money sits in a separate account. It never becomes part of the loan, so taking it out changes nothing about your loan.
- Redraw facility: You make extra repayments into the loan itself, and later you can withdraw some of that extra money back out. But the tax office treats a redraw withdrawal as a new borrowing, which can matter if the property later becomes an investment property.
That difference is the main reason many borrowers prefer an offset account: the money stays yours, in your own account, and withdrawing it never creates a new loan. We compare the two in detail in our guide to offset account vs redraw facility.
What does an offset account cost?
Offset accounts are rarely free. The cost usually shows up in one of two ways:
- A package or annual fee: Many offset loans come as part of a loan package that costs around $300 to $400 a year.
- A higher interest rate: Loans with an offset often carry a slightly higher rate than a basic no-frills loan. A higher rate applies to the whole loan, not just the part you offset.
Some lenders also charge a small monthly fee for each offset account. A few let you link more than one offset account to the same loan, which can help if you like to keep separate pots of money for bills, holidays, and savings.
When is an offset account worth it?
An offset account pays off when you keep a decent amount of money in it most of the time. Good signs it is worth it include:
- You keep a healthy savings buffer, for example $10,000 or more, sitting in your account most of the month.
- Your salary goes straight into the offset and your bills come out of it, so the average balance stays high.
- You want your emergency fund to work for you instead of sitting in a low-interest savings account.
- You may turn the home into an investment property one day. Money in an offset never reduced the loan, so the full loan can stay deductible later.
When is an offset account not worth it?
An offset account is not the right choice for everyone. It may not be worth paying for if:
- Your offset balance is almost always low. If you only ever hold a few thousand dollars in it, the interest you save may be less than the package fee or the extra rate costs you.
- You chose the cheapest basic loan on purpose. A basic loan with no offset and a lower rate can be cheaper overall when your savings are small.
- You would rather make extra repayments. If you are happy to put spare cash straight into the loan and rarely need it back, a redraw facility on a cheaper loan can do a similar job.
The government’s Moneysmart guide makes the same point: if your offset balance is always low, for example under $10,000, it may not be worth paying for this feature. Work out your own numbers before you pay for a feature you may not use.
How to get an offset account
If your current loan already has an offset feature, ask your lender to link an account to it. If it does not, you will usually need to refinance to a loan that includes one. Before you switch:
- Check whether the new loan’s rate and fees are higher than your current loan.
- Ask whether the offset is 100% or partial.
- Check whether the loan is variable or fixed, and whether the offset works the same way on a fixed rate.
- Work out the interest you expect to save against the fees you will pay.
- Check for any exit, break, or application fees on the switch.
Frequently asked questions
Does an offset account reduce my repayments?
No, not usually. Your scheduled repayment stays the same. The win is that less of it goes to interest and more goes to paying down the loan, so the loan ends sooner.
Do you earn interest on an offset account?
No. You earn little or no interest on the money in an offset account. The return is the interest you do not pay on your home loan, which is usually charged at a much higher rate than any savings account pays.
Can you have more than one offset account?
Some lenders allow it. You might link one offset account for your salary and bills and another for savings, for example. Check with your lender, as limits vary and some charge a fee per account.
Does an offset account work with a fixed rate home loan?
Sometimes, but often with limits. Many fixed rate loans have no offset at all, and those that do may offer only a partial offset. Variable rate loans are where offset accounts are most common.
Is an offset account better than a savings account?
It depends on how much you hold and what you need the money for. Money in a savings account earns interest you can be taxed on, while money in an offset saves you interest at your home loan rate, which is usually higher. But a savings account keeps your money separate from your loan, and some people prefer that. If your offset balance is small, a high-interest savings account can win.
This article is general information only. It is not personal financial advice. Home loan features, rates, and fees change, so check the current terms with your lender or a licensed adviser before you decide.
