Offset Account

An offset account is just like your normal bank account. It works alongside your loan account.

When you take out a home loan, you get a home loan account, which tells you how much you owe the bank. Then, you also have the offset account, which is like your normal everyday account. You can withdraw money from it, get a debit card to use with it or have your paycheque paid into it. The beauty of an offset account is that it earns interest at a similar rate to your home loan, effectively saving you money.

The most popular option is a 100% offset account, which means you will earn the same rate of interest that you are paying on your home loan. Some offset accounts might only pay 80% or less, so it is important to note that each type of offset account is different.

If that is a bit confusing, just go with the 100% offset account.

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Example:

If you owe $100,000 on your home loan and you decide to put an extra $10,000 into your 100% offset account, you reduce the principal amount you are paying interest on.

Home Loan Account: $100,000 (the amount you owe the bank)
Offset Account: $10,000 (spare money that you can use if needed, like a savings account)

In this example, you effectively pay interest on $90,000 ($100,000 - $10,000), making the outcome the same as a redraw facility.

However, with an offset account, the additional $10,000 is held in a separate account that you have full access to at any time, and it acts like an access or savings account.

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Offset vs Redraw: Which is Best?

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Both a 100% offset account and a redraw facility will give you the same result in terms of saving interest.

The advantage of a 100% offset account is that it offers flexibility that a redraw facility does not. For example, a lender can limit the number of redraws you can make over a 12-month period, but it is always at the lender’s discretion. There might also be fees that come with redrawing your funds.

A 100% offset account is very much like an access or savings account. It gives a borrower far greater flexibility. Many offset accounts also offer access to ATMs or EFTPOS and even credit cards. There are also likely to be normal transaction fees attached to them.

Ultimately, both an offset account and a redraw facility are excellent ways to reduce interest costs and help pay off your loan faster, whilst still having access to your money.

Which one is best for you, the borrower, depends on how much flexibility you need, and what your goals are in terms of paying down your principal.