Offset accounts

In the quest to outsmart your mortgage and build wealth faster, offset accounts stand out as one of the most powerful yet underutilised financial tools available to homeowners. If you're not using an offset account with your mortgage, you might be leaving thousands of dollars on the table.

What exactly is an offset account?

An offset account is essentially a transaction account linked directly to your home loan. Unlike standard savings accounts, every dollar in your offset account works to reduce the interest calculated on your mortgage.

Here's the magic: The balance in your offset account is subtracted from your loan balance before interest is calculated.

For example, if you have a $500,000 mortgage and $50,000 sitting in your offset account, you'll only pay interest on $450,000. This simple mechanism can save you tens of thousands in interest over the life of your loan while keeping your money fully accessible.

How much could you save?

Let's put some real numbers to this. On a 30-year, $500,000 mortgage at 4.5% interest:

• With no offset: You'll pay approximately $410,000 in interest over the life of the loan
• With a consistent $50,000 in offset: You'll save around $118,000 in interest and pay off your loan 4.5 years earlier
• With a consistent $100,000 in offset: You'll save approximately $195,000 in interest and pay off your loan 8 years earlier

Even smaller amounts make a big difference. Just having your $5,000 emergency fund and monthly salary sitting in offset could save you tens of thousands over time.

Offset accounts vs. redraw facilities: understanding the critical differences

Both offset accounts and redraw facilities can reduce your mortgage interest, but they're fundamentally different tools:

The key advantage of an offset account is flexibility – your money remains completely accessible while still working to reduce your interest payments.

Who benefits most from offset accounts?

Offset accounts provide the greatest benefit to:

1. High-income earners who can maintain large offset balances
2. Self-employed professionals needing to set aside money for tax payments
3. Property investors planning tax-efficient strategies
4. Future investors who might convert their home to an investment property later
5. Variable income earners (freelancers, commission-based workers) who need accessible cash reserves

Advanced offset account strategies

A common offset "mortgage hack"

Some savvy homeowners use what's called the "mortgage hack" strategy:

1. Set up your mortgage with 100% offset capability
2. Direct all income into your offset account
3. Pay all expenses via credit card
4. Pay off the credit card in full at the end of each month from your offset account

This maximises the daily balance in your offset account, reducing interest calculated daily. 

The risks associated with this strategy are clear: if you’re unable to repay your credit card in full and on time every month, you’re likely to be charged significant sums in interest from your credit card provider. It’s always smarter to set up simple to manage finance than complicated methods that can catch you out. Check with your financial advisor before employing this technique.

Multiple offset accounts

Some lenders allow you to link multiple offset accounts to a single loan. This enables you to:

• Have separate savings buckets for different goals
• Keep emergency funds separate from day-to-day money
• Maintain dedicated accounts for tax payments or business expenses

All while ensuring every dollar is working to reduce your mortgage interest.

Splitting loans for tax efficiency

For property investors or those planning to convert their home to an investment property later, an offset may work against your tax strategy by reducing the interest you pay on your loans:

For this reason, it may be more prudent to:

1. Split your loan into multiple portions
2. Link offset accounts strategically to specific loan splits
3. This provides maximum flexibility for future tax planning

Common offset account questions

Does 100% of my offset balance reduce my loan interest?

Not always. Some "partial offset" accounts only offset a percentage of your balance. Always confirm you're getting a 100% offset.

How is the offset calculated?

Most lenders calculate the offset daily and charge interest monthly. This means your daily balance matters – having money in your offset for even a few days helps.

Are there limits to the offset amount?

Some lenders cap the amount that can be offset against your loan. Others allow unlimited offsets, even exceeding your loan balance in some cases. Split loans can allow you to offset a portion of your variable rate loan, while maintaining the benefit of a fixed rate loan for another portion.

Will fees eat up my savings?

Offset accounts typically come with fees – either monthly account fees or as part of a package. For the offset to be worthwhile, your interest savings need to exceed these fees.

How a mortgage broker helps you maximise offset benefits

Working with a mortgage broker offers significant advantages when setting up an offset strategy:

1. Product selection expertise: Not all offset accounts are created equal. A broker can identify which lenders offer true 100% offset accounts with the best features.
2. Fee structure optimisation: Your broker will calculate whether package fees or individual account fees make more sense for your situation.
3. Loan structure advice: Setting up your loans correctly from the beginning can save significant money and provide flexibility for future wealth building.
4. Multiple lender access: Some lenders offer superior offset features but don't advertise directly to consumers.
5. Future planning: A good broker helps structure your mortgage for both current needs and future scenarios like property investment.

Is an offset account right for you?

While offset accounts offer significant benefits, they're not for everyone. You'll get the most value if:

• You can maintain a substantial balance in the account
• The interest savings exceed any fees charged
• You value flexibility and immediate access to your funds
• You're in a higher tax bracket where tax-free interest savings matter more
• You might convert your property to an investment in the future

The bottom line

An offset account is much more than a simple bank account – it's a powerful financial tool that can shave years off your mortgage and save you thousands in interest. The key is understanding how to maximise its benefits for your specific situation.

Ready to explore whether an offset account could supercharge your mortgage strategy? Let's talk. Our mortgage brokers specialise in creating custom loan structures that put more money back in your pocket over time.