If you’ve ever asked, “How does an offset account work?” – you are not alone. Offset accounts are one of the most powerful yet under-utilised tools available to Australian homeowners.
At Lending Association, we get this question often – and for good reason. When used correctly, an offset account can save you thousands in interest, reduce the life of your loan and give you greater flexibility with your money.
What is an Offset Account?
An offset account is like a regular everyday bank account – but with a powerful twist. It’s linked to your home loan and the balance in that account offsets (reduces) the amount of your loan that you’re charged interest on.
Let’s look at a simple example:
● Home loan balance: $500,000
● Offset account balance: $50,000
● Interest is only charged on: $450,000
Instead of earning interest (like you would with a traditional savings account), your money works harder by reducing the amount of your mortgage accruing interest.
This means you pay less interest, more of your repayments go towards the principal, and ultimately, you pay off your home loan faster.
How Does an Offset Account Actually Work?
Here’s how the mechanics work in simple terms:
● Your offset account looks and functions like a normal transaction account. You can deposit your salary, pay bills, use a debit card and transfer money as usual.
● Every dollar in that account is deducted from your home loan balance when your interest is calculated daily.
● The higher the offset balance, the less interest you pay.
For example, if you consistently maintain $50,000 in your offset account, that’s $50,000 less being charged interest every day. Over the life of a loan, this can add up to tens of thousands of dollars in savings.
Full Offset vs. Partial Offset
Offset accounts come in two main types:
● 100% Offset Account: The full balance offsets your loan principal – these are the most beneficial.
● Partial Offset Account: Only a portion of the balance is considered – for example, 40% of your balance offsets the loan.
At Lending Association, we help you compare loan products across lenders to ensure you are getting a full offset account where it matters most.
Why Use an Offset Account?
There are several key benefits to using an offset account:
● Reduce Interest: The most obvious benefit is saving on interest. By reducing the principal on which interest is calculated, you reduce the total amount paid over the life of your loan.
● Pay Off Your Mortgage Faster: With less of your repayment going toward interest, more goes directly to paying down your loan.
● Maintain Access to Your Money: Unlike making extra repayments directly into your mortgage, an offset account allows you to withdraw your money at any time – giving you flexibility without losing the benefit of interest savings.
● Improve Cash Flow Management: Offset accounts can work beautifully with budgeting tools. For example, if you deposit your salary and delay bill payments until the due date, you maximise the days your full balance offsets your loan.
Is an Offset Account Right for You?
An offset account is most effective when you:
● Maintain a steady balance (e.g. regular income or savings)
● Want flexibility without locking funds away
● Are focused on long-term interest savings
● Prefer a low-risk, high-impact financial strategy
Even modest savings balances or salary deposits can make a big difference over time. And when paired with other strategies like refinancing or smarter loan structuring, offset accounts can dramatically improve your financial position.
Tips to Maximise Your Offset Account
Want to make your offset account work even harder? Try these tips:
- Deposit your salary directly into the offset account
- Use a credit card for monthly expenses, then pay it off in full from your offset each month
- Delay bill payments until the due date (so your money offsets for longer)
- Consolidate savings and emergency funds into the offset
- Review your account regularly to ensure it’s set up and functioning correctly
Offset Account vs. Redraw Facility: What’s the Difference?
It’s easy to confuse offset accounts with redraw facilities, but they’re different:
● An offset account is separate from your loan and works like a bank account
● A redraw facility lets you make extra repayments and “redraw” them if needed
While both can help reduce interest, offset accounts offer more immediate access and transparency, making them ideal for day-to-day flexibility.
Ready to Take Control of Your Home Loan?
If you’re asking “how does an offset account work?”, the next question should be: “How can I make it work for me?”
At Lending Association, we don’t just match you with a lender – we build a lending strategy that suits your lifestyle and future goals. Whether you’re considering refinancing, reviewing your loan structure, or comparing offset account options, our expert brokers are here to help.
Call us today and discover how a smarter setup can save you thousands – and help you own your home sooner:
SYD 02 8935 1111 I MEL 03 9122 1111 I BNE 07 3521 1111
