Offset accounts, explained properly
An offset account is the simplest useful feature in home lending and the most frequently mis-sold. It saves you interest on money you keep access to. Whether it is worth the package fee, and whether you need one at all, depends on a balance you can estimate in about a minute.
The mechanism
An offset is an everyday transaction account linked to your loan. Interest is charged on the loan balance minus the offset balance, calculated daily. Thirty thousand dollars sitting in offset against a six hundred thousand dollar loan means interest is charged on five hundred and seventy thousand. The money remains yours, spendable at any time, which is the entire point: you get the interest benefit without surrendering access.
Offset versus redraw
Redraw gives you access to extra repayments you have already made into the loan. Both reduce interest. The practical difference is ownership of the funds: offset money is your savings sitting beside the loan, redraw money has been paid into the loan and is being borrowed back. For an owner-occupier who never moves, the difference is mostly administrative. If the property might one day become an investment, it matters considerably.
Why it matters for future investors
If you later rent out the home, the deductibility of the debt generally follows what the borrowed money was used for. Money redrawn from a loan and spent on something else can change the character of that portion of the debt. Money sitting in an offset was never repaid into the loan, so the loan balance is undisturbed. That is a tax question rather than a lending one and belongs with your accountant, but the structure decision is made when you take the loan.
When it is not worth it
Offsets usually sit inside a package with an annual fee. If the balance you will realistically hold is a few thousand dollars, the interest saved may not cover the fee, and a simpler no-frills loan at a lower rate can be better. There are also partial offsets, where only a percentage of the balance counts, and multiple-offset products for people who bucket their savings. These are genuine product differences worth comparing rather than assuming.
What decides whether an offset pays
Four inputs, and you can estimate all of them yourself.
Not the balance you hope to. Interest is calculated daily, so the average balance across the year is what counts.
The higher the rate, the more each dollar in offset saves. Run it in the offset calculator.
Annual fees vary. The saving needs to clear it before the offset is doing anything for you.
If it might, the offset-versus-redraw decision is worth taking seriously now rather than later.
Not sure an offset is worth the fee?
Charles can compare a package with offset against a no-frills loan on your actual balance and rate.
Offset account questions
How much do I need in offset to make it worthwhile?
Enough that the annual interest saved exceeds the package fee. At typical rates that is usually in the low tens of thousands rather than a few thousand, but it depends on your rate and the fee. The arithmetic takes a minute and is worth doing rather than accepting either the sales pitch or the dismissal.
Can I have more than one offset account?
Some lenders allow several against one loan, which suits people who separate savings into buckets. Others allow one, and some offer only partial offset where a percentage of the balance counts. It is a real point of difference between products and worth checking before committing to a lender.
Is offset better than making extra repayments?
They save similar amounts of interest. Offset keeps the money accessible and keeps the loan balance undisturbed, which matters if the property might become an investment. Extra repayments reduce the debt directly, which suits people who would rather not have the money available to spend.
Does the money have to stay in the account?
No. Interest is calculated on the daily balance, so funds moving in and out simply change the saving day by day. Many people run their salary through the offset and pay expenses from it, so the balance works while it sits there.
Do all lenders offer proper offset accounts?
No, and the differences matter. Some offer full offset, some partial, some none, and some restrict offset to particular loan types or to variable portions only. A fixed-rate loan often has limited or no offset available, which is one of the trade-offs in fixing.
Related guides
General information only, not credit or financial advice. Professional lending policies, eligible occupations and loan-to-value thresholds vary by lender and change over time. Eligibility is confirmed against current lender policy in an assessment; nothing on this page is a promise that any lender will approve any application.
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