The short version
- Money in an offset account is taken off your balance when interest is worked out.
- It cuts your interest while your savings stay easy to reach.
- Loans with offset can cost a little more, so check it's worth it for your balance.
How an offset account works
An offset account is a transaction account linked to your home loan. The balance is taken off your loan when interest is worked out, so $20,000 in offset on a $500,000 loan means you pay interest on $480,000.
Your money stays available to spend, unlike extra repayments into a loan without offset. A 100% offset counts the whole balance; a partial offset counts only part of it.
Is it worth it?
It depends on how much you keep in the account. Loans with offset often have a higher rate or an annual package fee, so compare the cost with the interest you'd save.
Pros
- Less interest, as your savings and pay reduce the balance interest is charged on.
- Your money stays in an everyday account you can spend from.
- No tax on the interest you save, unlike interest earned in a savings account.
Cons
- Loans with offset often have higher rates or package fees.
- Only worth it with a decent balance in the account.
- Usually only full on variable loans; fixed loans may have a partial or no offset.
Alternatives
- Redraw. Paying extra into the loan cuts interest the same way, though the money is a step further away.
- A high interest savings account, if your loan has no offset. Interest earned is taxed, though.
- A basic loan with a lower rate, if you won't keep much in an offset.
How to apply
Most people get pre-approval for a home loan with an offset account before they start making offers, then the full approval once they've found a home.
- Get your documents together. Payslips, two years of tax returns if you're self-employed, bank statements showing your savings, and details of your debts and credit limits.
- Get pre-approval. It tells you how much you can borrow and shows sellers you're serious. It usually lasts three to six months.
- Find the home and sign the contract. The lender then values the property before it gives full approval.
- Settle. Your lender pays the seller, and your repayments start about a month later.
What to compare
Start with the rate for your situation: the rate a lender offers depends on whether you'll live in the home or rent it out, how you repay, and the size of your deposit. The comparison above picks each lender's rate for your choices.
Then look past the rate.
- Fees: upfront fees, and annual package fees that often come with an offset account.
- Features: an offset account, redraw, extra repayments and the option to split the loan between fixed and variable.
- The comparison rate, which adds standard fees to the rate for an example loan of $150,000 over 25 years.
- Any cashback, but only after the rate and fees, since a higher rate can cost far more over the life of the loan.