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Home loan guide / Home loans explained

What's an offset account?

1 min read

Laura Osti

Like a good pair of sneakers, an offset account can help you get ahead.

Not sure what an offset account is or whether you should have one or not? You're confused because it's been made that way. Confusing. We explain, in a friendlier way, below.

Offset account

/ˈɒfsɛt əˈkaʊnt

A name for a savings account that’s connected to your home loan. When your lender works out how much interest to charge you, any money in this account (such as the money you’re saving for a holiday) is taken off your home loan principal balance. It’s like you're paying off your home loan, without actually paying it off. So you can still go on your holiday.

How it works

Your offset account works like any other savings account, with a card to pay for things or withdraw cash, from that account. Plus all the other things you’d expect, such as online banking, statements and annoying marketing emails.

But there is a special added bonus feature prize: it’s linked to your home loan, so the balance of money in your offset account is taken away from your home loan balance when your interest is calculated.

Most lenders do the offset calculation like this:

  • Say you have a $500,000 home loan.
  • And you have $10,000 in your offset account.
  • You'll be charged interest on $490,000 instead of the full $500,000.

This means if you hold money in your offset account over a period of time, you can reduce the amount of interest charged on your home loan. And because you're paying less interest, you'll pay off your loan faster too.

Exactly how much could you save? For example:

  • If you have a $500,000 loan
  • And you have an interest rate of 4.5%
  • With no offset, you’re likely to pay $412,000 in interest charges over a 30 year loan term.
  • If you have $50,000 steadily in an offset account over that 30 years, you’ll save about $42,000 in interest charges
  • Which will reduce your loan term by more than a year, too.

To find out exactly how Tic:Toc works out the offset calculation head over to our home loan guide, or get in touch with one of our home loan specialists.

Your repayments

Just because you’re paying less interest, doesn’t mean your loan repayments will go down. You’ll have the same home loan repayment, but more of that amount will be going towards paying down the principal loan balance, and less going towards interest.

Other benefits

Flexibility

Flexibility is a great thing anytime, but especially when you’re going through a period of change or uncertainty - and because of the way offset accounts are structured, they end up being pretty handy to have.

Offset accounts can assist you if you’re looking to build good financial/saving habits by helping you pay off your loan faster, save on interest paid, but also have funds available to withdraw when you want (holiday, anyone?) - it's your money!

Set and forget for ultimate convenience

Offset accounts are separate to your home loan account, so you can ask your employer to make direct payments into your offset account so you're not tempted to spend it. If you can’t get work to set up a payment, you can set it up yourself – set a direct debit or auto-payment to go out shortly after you’re paid.

Make your money work for you


Offset accounts can help you save money by paying less interest on your home loan, but it can also help you save on tax. How? If you've got money in an interest-earning savings account, it's likely that you'll also be taxed at the end of the year for any interest earned.

By putting your savings into an offset account, you could end up saving more because any interest you earned on your savings would’ve been subject to tax.

Your money is protected

An offset account is just like any other savings deposit account, and it’s guaranteed under the Australian Government’s Financial Claims Scheme (FCS) for up to $250,000.

The minor catch

There is usually a cost involved in having an offset account, which may be a monthly fee or it could be built into the interest rate. If you don't have a certain balance in your offset account, it may not be worth paying to have the feature.

So, it's best to make sure you know what it’s going to cost you before you make your decision. Then you won’t have any reason to get surprised or offset. We were waiting paragraphs to say that.

Did you know fixed rates and offset accounts are a match made in heaven? Learn more.

If you'd like more information on how Tic:Toc's offset account works, our offset FAQ has heaps of handy info.

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