Rising Above: Why Aussies are loving offset accounts

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Money might be a bit tight nowadays (thanks to the cost-of-living pressures!). However, if you’ve managed to stash away some savings while also having a home loan, there’s a smart strategy to help you maximize your extra funds.

You may have heard of offset accounts but don’t really know what the big deal is.

Well, they’re actually becoming more and more popular as an extra feature for home loans. Recent data reveals that homeowners are socking away cash in their offset accounts like never before.

In fact, the money stored in offset accounts has grown to 11% of the total credit limits, marking the highest proportion since APRA began tracking this data in March 2019.

This means that, on average, borrowers with offset accounts are only paying interest on 89% of their home loan balance each month.

So how do offset accounts for a home loan actually work?

An offset account is basically a savings account that’s linked to your home loan.

You won’t earn interest on the money in the offset account. Instead, the balance in this account is subtracted from (or ‘offset’ against) the balance of your home loan when your loan interest is calculated.

For instance, let’s imagine you have $20,000 in an offset account and a home loan worth $615,000, which is roughly the average size of a new mortgage across Australia.

Instead of paying interest on the entire $615,000 each month, the lender will only charge you interest on $595,000. That’s the $615,000 loan minus the $20,000 in the offset account.

So, you end up paying less interest on your home loan for every month that the $20,000 remains in your offset account.

And there’s another great perk: since your loan repayment stays the same, a larger portion of each payment chips away at the loan principal. This, in turn, leads to lowering next month’s interest cost.

And the cycle continues.

This is how offset accounts tilt the mortgage scales in favour of borrowers, offering savings on interest and potentially accelerating the process of paying off their home loan sooner.

interest and potentially accelerating the process of paying off their home loan sooner.

What’s driving the popularity of offsets at the moment?

In short, offsets are gaining popularity, especially with the current high interest rates.

Since no interest is earned on the offset account balance, there’s no tax implication, unlike with a separate savings account where high earners might lose a chunk of their interest earnings to tax.

What’s more, home loan interest rates charged by lenders are typically higher than the interest returns on savings accounts. So, offset accounts enable borrowers to maximize their spare cash by saving more on loan interest compared to what they could earn with a regular savings account.

As a cherry on top, some lenders allow multiple offset accounts (complete with debit cards!) linked to a single home loan. This means you can put all your money to work each month, rather than spreading it across several low-interest transaction accounts.

What you need to know about offset accounts

First off, remember that the money you stash in your offset account could potentially be used for other investments.

So, think about whether it’s more beneficial to put that money towards paying off your home loan faster or investing it elsewhere for your future.

Secondly, ensure you’re getting a competitive interest rate on your home loan.

Offset home loans might come with extra fees or higher interest rates compared to traditional loans, although not always.

Lastly, offset accounts typically don’t pair well with fixed-rate home loans. But don’t worry, you could explore splitting your loan into part fixed and part variable, with the offset account linked to the variable portion.  Having said that, we do have some lenders that allow offsets on their fixed rate loans and we can help you with that if you would like the certainty that comes from a fixed rate home loan.

That’s why having a chat with us about your home loan needs is crucial.

We can sift through our extensive network of lenders to find a loan that suits you best, and discuss whether an offset account could be a good fit for your situation. Simply reach out on 1800-E-LOANS for a chat.

1800 35 62 67

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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