For many homeowners, their mortgage is the largest cost each month. If that applies to you, then learning more about an ‘offset account’ could help you transform your loan into a tool to manage your money as you build your asset, instead of just being a cost to cover.
In fact, an offset account can reduce the interest cost of your home loan and could help pay your loan off sooner. Let’s take a closer look.
What is an offset account?
Offset accounts generally work just like any transaction account - you can make withdrawals and deposits whenever you’d like. The difference is, offset accounts link to your home loan to reduce the amount of interest you’re charged. Interest is generally calculated on your home loan amount minus the offset account balance, instead of the entire home loan amount.
For example, let’s say you have a $500,000 home loan. If you deposited $20,000 into your offset account you would only be charged interest on $480,000.
If it’s used well against your home loan, an offset account could have many benefits, including:
- Reducing the amount of interest you pay and saving you money.
- Helping you pay your loan off sooner so you can spend and invest your money elsewhere.
- Or alternatively, if you need the extra cash an offset account could help reduce the size of your monthly mortgage repayments if you are an investor with an interest only loan.
Offset Account Benefits
Some of the many benefits of having an offset account include:
- Reducing interest payments: With an offset account, the interest charged on your home loan is calculated on the balance of your loan minus the balance of your mortgage offset account. As a result, you can save money on interest payments, potentially reducing the amount of time it takes to pay off your loan.
- An offset account allows you to use your savings to reduce the amount of interest you pay on your home loan. This means that you can save more money while still having access to your funds if you need them.
- Flexibility: Unlike a fixed-term deposit, an offset account allows you to withdraw your funds at any time without incurring penalties. This provides you with flexibility and easy access to your funds when you need them.
- Paying off your loan faster: By using a mortgage offset account to reduce the amount of interest you pay on your home loan, you can potentially pay off your loan faster. This is because more of your repayments will go towards reducing the principal balance of your loan, rather than paying interest charges.
Using an offset account
There are many ways that people access the benefits of an offset account, meaning that they can use various strategies to on their home loan. This includes:
- Most people have their salary paid into the offset account and use it for everyday transactions and living costs.
- Others will use it for long-term savings for things like holidays and home renovations, topping it up whenever they can.
- Some simply deposit an amount they’re not using into the account and leave it be, such as savings, bonuses from work or windfalls like inheritances.
However, you use your account, it can be a good idea to keep the balance as high as possible to maximise your interest savings.
You can have more than one offset account attached to your loan. This allows you to keep funds and savings in special accounts, like forward planning for bills and holidays and still save you interest on you loan.
How much could you save with an offset account?
The amount of savings you make with an offset account will depend on your home loan rates and the amount you deposit into the account. The more you deposit, the more you’ll save.
|No offset account||With Qudos Bank offset account|
|Home loan principal||$500,000||$500,000|
|Offset account amount||$0||$20,000|
|Interest charged on||$500,000||$480,000|
|Interest savings first year (30 year loan term)||$0||$578|
|Interest savings 30 year loan term||$0||$9,930|
In our example, an offset account with a balance of $20,000 could save you almost $600 in the first year and close to $10,000 over a standard 30 year loan term.
Qudos Bank home loans with offset accounts
To make it as easy as possible for you to save money and get a great deal on your home loan, we offer multiple offset accounts on several of our home loan products for both new and existing home loan customers. That includes the award-winning Qudos Low Cost Home Loan and our Qantas Points Home Loan – click through, or give us a call on 1300 747 747, to find out more.
Offset Account Frequently Asked Questions
How does an offset account work?
An offset account is a transaction account that is linked to your home loan account. The balance of your offset account is offset against the outstanding balance of your home loan, which means that you only pay interest on the difference between the two balances.
For example, if you have a home loan with a balance of $1,000,000 and you have $100,000 in your offset account, the interest on your home loan will only be calculated on the net balance of $900,000. This means that you will pay less interest on your home loan than you would have if you did not have an offset account.
The funds in your offset account are still available for you to use as you need them, just like any other transaction account. You can deposit and withdraw funds from your offset account as needed, without any penalties.
An offset account can help you save money on interest charges over the life of your home loan. It can also help you pay off your home loan faster because more of your repayments are going towards reducing the principal balance of your loan, rather than paying interest charges.
Can you withdraw from an offset account?
Yes, you can withdraw funds from an offset account as needed, without any penalties. An offset account is essentially a transaction account that is linked to your home loan, and it works by offsetting the balance of the account against the outstanding balance of your home loan when calculating interest charges.
So, the funds in your offset account are still available for you to use as you need them. You can deposit and withdraw money from your offset account just like you would with any other transaction account. There are no restrictions on how you use the funds in your offset account, and you can access them at any time without incurring any fees or penalties.
However, it's important to keep in mind that withdrawing funds from your offset account will reduce the amount of money that is offset against your home loan. This means that you’ll pay more interest charges on your home loan, and it may take longer to pay off your loan if you withdraw too much money from your offset account.
Do offset accounts reduce monthly repayments?
An offset account does not reduce your monthly repayments on your home loan directly. Instead, it reduces the amount of interest you pay on your home loan, which can indirectly affect your monthly repayments.
When you have an offset account linked to your home loan, the balance of the account is offset against the outstanding balance of your home loan when calculating interest charges. This means that you only pay interest on the difference between the two balances.
The reduction in interest charges can potentially free up some funds in your budget that you can use to make extra repayments on your home loan or to cover other expenses. So, while an offset account doesn't directly reduce your monthly repayments, it can indirectly help you pay off your home loan faster or improve your cash flow.
Is an offset account worth it?
Whether an offset account is worth it ultimately depends on your individual financial situation and goals.
An offset account can be a useful tool for saving money on interest charges and potentially paying off your home loan faster, while still having access to your funds. However, there may be other factors to consider, such as the interest rate on your home loan, the fees and charges associated with the offset account, and your financial goals.
To determine whether an offset account is worth it for you, it's important to not only compare home loan rates, but also to speak to a financial professional who can help you assess your options and make an informed decision based on your individual circumstances.
If you’re interested in opening up an offset account, contact Qudos Bank to speak to an expert for personalised advice and guidance on the best banking products and services for your needs.
Qudos Mutual Limited trading as Qudos Bank ABN 53 087 650 557 AFSL/Australian Credit Licence 238 305. The information in this article is of a general nature and has been prepared without considering your objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances.
Loans are subject to approval. Normal lending criteria, terms and conditions and fees and charges apply. Mortgage insurance is required for home loans over 80% and is subject to approval.
You should read and consider the relevant terms and conditions and our Financial Services Guide available on our website qudosbank.com.au, before deciding whether to obtain any of our financial products or services.
Published November 2020, updated June 2023