Offset accounts 101

It’s surprising how many people don't understand how a loan offset account works...

the freedom it adds to your finances and the savings it can create.

What is an offset account

On the surface an offset account acts like any other deposit account… you can put money in and take it out as freely as you wish.

You nominate your chosen account as your offset account and money in that account is then linked to and  ‘offset’ against the balance of your loan, with interest only being paid on the difference. 

Looking at a simple example;

• Loan balance $100,000

• Offset balance $10,000

• Interest charged on $90,000

What it essentially means, is that you can get a return the same as your home loan rate, on any cash or savings you hold that would otherwise be earning very little if any return.

What are the benefits

The main outcome will always be interest savings, however the other key benefit is the liquidity you get. An offset provides the same savings as repaying your loan early whilst giving you complete access to your money. 

Redraws are almost standard these days, which is another great feature that provides both savings and flexibility for those who don’t need quite so much liquidity. 

Why doesn’t everyone have one

Most people should. There is a perception that has at times been true, that you’d pay in some other way. 

It was once common that an offset came with a premium loan product with a significantly higher interest rate or fees. In most cases this is true, however you can get an offset account at base rates if you look around. Currently, both ING and Macquarie have offset products with some of the sharpest rates in the market. 

Even if you pay a package fee of around $300, or an additional 5bps in interest, you generally need around $10,000 rolling balance and you’ll save enough interest to come out in front. 

If your lender doesn’t include an offset account without an interest penalty, you should look at alternate options as the savings could be significant.