What are ‘Offset’ accounts?

February 7, 2024

Kathryn Hamilton

An offset account is a transaction account linked to your home or investment loan. You can make deposits or withdraw from it as you would with a regular transaction account. With a standard home loan, you pay interest on the total amount owing. But with an offset, interest is charged on the difference between your home loan balance less the amount in your linked offset account. It uses the money in that account to ‘offset’ your loan balance.

For example if you have a home loan of $400,000 and $30,000 in your offset account; you’ll only be charged interest on a loan balance of $370,000 ($400,000 – $30,000).

This means you can pay less interest with an offset account. The more money you have in the offset account, the less interest you pay on your home loan.

In most cases, the offset feature is only available on variable-rate home loans (although some lenders offer an offset feature on selected fixed-rate home loans).

Things to consider before throwing all your savings into an offset account:

• Is there a limit to the balance of the account that will be offset?
• Does your financial institution cap the interest amount you can offset?
• Could you earn a higher interest rate than what you are saving by investing your money elsewhere?
• Are there any account-keeping fees?
• In the event of an emergency, how easily can you access the money you put into your offset compared to your redraw facility?

Benefits:

• You can take advantage of interest-free days on your credit card – use your credit card for everyday purchases and leave your money in the offset account. You keep your money in your offset account longer – offsetting interest on your home loan. Just don’t forget to pay the full amount on the credit card by the due date!
  
  
• For investment loans offset accounts can reduce the interest but won’t affect the actual loan balance. Withdrawing from an investment loan for personal use will change the tax deductibility of the total amount of interest paid. Withdrawals from an offset account don’t change the purpose of the investment loan as loan drawdowns do.
  
  
• Some people may have their pay deposited straight into their offset account and treat it as an everyday transaction account. Others may use their offset as a savings account for things like holidays or renovations – or for less exciting purposes like setting aside money for their tax bill.

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.

Speak to one of our accountants to see what tax benefits an offset account could have for you.