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How do home loan offset accounts work?

May 5, 2022

If you’re just starting out with home loan research, you’ll no doubt come across the term ‘offset’. Small word. Big potential on a home loan. But only if you use it right. To make the most of a home loan offset account, it pays to wrap your head around how it all works. And let’s face it, like other financial jargon, it can be a little complex. So let’s break down home loan offsets so you know exactly what’s what and how to use one to your advantage.

First things first. What’s an offset account?

A home loan offset account is an account that’s linked to your home loan. It’s like an everyday transaction account – you don’t earn interest on it like a savings account – but you can use it for everyday expenses, and move money in or out of it whenever you like. Your salary can go straight into your offset account, too.

But it’s more than just a transaction account. Think of it like a piggy bank for your home loan. It helps you save on interest and potentially pay off your loan sooner. But unlike a piggy bank (well, depending on who’s the owner), you can access your money at any time.

Sounds great. How does it work and what could I save? 

Because your offset account is linked to your home loan, your home loan looks at the daily amount in the offset account and subtracts that from the amount you owe on your home loan. This is the ‘offsetting’ part. Then, it uses the result to calculate your interest. 

Example

Say you’ve just taken out a $500,000 loan. Without an offset account, you’ll be charged interest on that full amount.

With an offset account – and let’s say you’ve got $15,000 in it for the whole month of June – you’d be charged interest on $485,000 instead for that month. 

Depending on your interest rate, your loan term and how long you keep that $15,000 in the offset, you could save a huge amount in interest over the life of the loan. Our interest repayment calculator could come in handy here to help you crunch the numbers on what you’d save on your loan.

Remember, interest is calculated daily

Interest is calculated daily and charged to the loan at the end of the month. So if, for example, you have $15,000 in the offset for 4 days of the month only, your home loan balance is offset just for those 4 days – not for the full month. 

What’s the catch?

Generally, offset accounts are only available with certain home loans. You may have to pay an extra monthly fee, or it might come as part of a home loan package which has an annual fee. 

It’s worth doing some maths here, to weigh up whether the fees you’ll pay for the perks of having an offset account are more or less than the interest you’d save by offsetting your home loan. 

If you’re the type to keep a healthy balance in your everyday transaction account, and continually top it up with your weekly pay, then an offset account could deliver great value. But if you don’t typically have spare change floating around, then a basic home loan could be more your thing.

I’m keen. What offset accounts do you offer?

At Bank Australia, an offset account is included as part of our Premium Home Loan Package and Clean Energy Home Loan (these loans, which include other perks, too, come with an annual package fee of $350). 

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