Why Offset Accounts Are Hitting New Highs (and How They Can Save You Thousands)

Why Offset Accounts Are Hitting New Highs (and How They Can Save You Thousands)

Spare cash can be tight right now (cost of living crunch, anyone?). But if you’ve got some savings and a home loan in Australia, there’s a way to make your money work harder, through an offset account.

Offset home loans have become one of the most popular ways for borrowers to reduce interest and pay off their mortgages sooner. In fact, new data shows Australians are putting money into their offset accounts at a record pace.

Balances in offset accounts have now reached 11% of credit limits, the highest share since the Australian Prudential Regulation Authority (APRA) began tracking this data in 2019.

That means, on average, people with offset accounts are paying interest on only 89% of their home loan each month.

What Is a Home Loan Offset Account and How Does It Work?

A home loan offset account is a transaction or savings account that’s directly linked to your mortgage.

The bank doesn’t pay you interest on the money sitting in your offset account. Instead, the balance in that account is deducted from (or offset against) your home loan balance when calculating interest.

For example:
If you have a $20,000 balance in your offset account and a $615,000 home loan, you’ll only pay interest on $595,000.

This simple setup can reduce the amount of interest you pay every month, and because your repayment amount usually stays the same, more of each payment goes toward your principal. Over time, this helps you pay off your loan faster and save thousands in interest.

Why Offset Accounts Are So Popular Right Now

Offset home loans are becoming increasingly popular, and it’s easy to see why, especially during periods of high interest rates.

Here’s why more Australians are turning to offset accounts:

• Tax-free benefit: Because no interest is earned on an offset account, there’s no tax payable, unlike a savings account where interest income is taxable.
• Better value than savings accounts: Home loan interest rates are generally higher than the interest paid on savings. So, the money you “save” through your offset often outperforms what you’d earn in a regular account.
• Multiple offsets for flexibility: Some lenders let you have multiple offset accounts (with debit cards attached) linked to the same home loan, allowing you to manage different budgets while still reducing loan interest.

Put simply, an offset account helps you swing the mortgage pendulum in your favour, saving on interest while potentially paying down your home loan sooner.

Things to Consider Before Opening an Offset Account

Before deciding if an offset home loan is right for you, it’s important to weigh up the pros and cons.

Here’s what to consider:

• The funds in your offset account are money you could otherwise invest elsewhere. Consider your broader financial goals.
• Some offset home loans come with slightly higher fees or interest rates than standard loans, it’s worth comparing options.
• Offset accounts typically only work with variable rate loans, not fixed-rate loans. However, you can consider a split loan (part fixed, part variable) with the offset attached to the variable portion.