What is an offset account?
An offset account is a transaction account linked to your home loan. You can make deposits or withdraw from it as you would with a regular transaction account.
The big difference is that when you hold money in an offset account over a period of time, you can reduce the amount of interest charged on your home loan. The higher the balance and the longer the period, the less interest you’ll pay.
Generally speaking, the offset feature is only available on variable rate home loans (although some lenders offer an offset feature on selected fixed rate home loans).
How does it work?
Sometimes the best way of explaining things is to use an example.
Let’s say you take out a $400,000 home loan.
You then deposit $10,000 into your offset account.
You’ll now be charged interest on $390,000, instead of the full $400,000.
This will happen for as long as the $10,000 stays in your offset account.
Offset account v normal savings account
Your money generally works harder in an offset account compared to a regular savings account. That’s because the interest rate you pay on a home loan is usually higher than the interest you earn in a savings account.
Another advantage is the interest you save by using an offset account won’t be considered income – which means it won’t be taxed. On the other hand, the interest you earn on a savings account will generally be considered income – and that means it may be taxed.
Is an offset account right for you?
If you want regular access to your money, then an offset might work for you.
But remember that most lenders will charge for an offset account. You may pay a monthly fee. Or if your offset account is offered as part of a package, there’ll be an annual package fee.
Redraw facilities vs a savings account
Redraw facilities can be an effective place to keep your savings. But instead of earning interest as you would in a savings account, you’re reducing the amount of interest you pay on your home loan.
Redraw vs offset accounts
Offset accounts and redraw facilities both have the potential to save you interest on your home loan, but there are important differences.
An offset account works much like an everyday transaction account. You can withdraw money at ATMs and buy things using a debit card.
A redraw isn’t an account as such, but rather a facility attached to your home loan. So it doesn’t give you the flexibility to access money in the same way that an offset account can. For some people this can be a benefit as it may reduce the temptation to spend.
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