What is an offset account, and how does it work?

Take a look at the short video above, which explains offsets and how they work.

The key points

The points below summarise what an offset account is and how it works.

• An offset account is generally a transaction or everyday account that is linked to your home loan account.
• It is not an interest earning account, such as an online saver. Instead, it is an account you would use for daily transactions, such as receiving wages and paying bills.
• In many cases the account has a debit card attached, allowing you to withdraw funds from ATMs and use EFTPOS.
• The “link” of the transaction account as an offset is why it is commonly referred to as an offset account.
• The offset link means the lender will treat the balance in the offset account as if it were deposited into your home loan account.
• Therefore the interest calculated on your home loan is based on the loan balance minus the offset balance, rather than the full balance owing.
• What most people do not know is that interest on a home loan is calculated daily.
• As such, interest is calculated on the difference between the balance in the home loan account and the offset account each day.
• For this reason it is beneficial to keep the offset balance as high as possible, every day.
• For example, if you held a balance of $10,000 for one day, then withdrew it all leaving $0 for the rest of the month, you would only benefit from the interest saving for the single day you held that balance.
• Most offsets are “full” or “100%” facilities. Some are “partial” offset facilities. Though not common, it is worth checking which one you have.
• Important: most lenders charge an account keeping fee for the offset feature. This can range from $8 per month to $395 per annum.
• Consider the cost against the potential saving when deciding whether an offset will be beneficial for you.

Is an offset right for you?

That depends on how much you typically hold in your everyday account, and on the fee your lender charges for the feature. If your balance is usually modest, an annual fee can outweigh the interest saved. If you keep a meaningful balance, an offset can make a real difference over the life of a loan. We are happy to run the numbers with you.