What does mortgage offset mean?

Mortgage offset means offsetting your loan balance against your savings balance. A mortgage offset account is a daily transaction banking account or a savings account that is linked to a home loan. The balance in the account is ‘offset’ against the balance owing on the home loan, thereby lowering the interest that is charged on the loan.

An offset account allows you to withdraw extra money when you need it and add money when you have spare cash. The more you save in your account, the more you offset the amount owing on your loan and the lower your total interest bill becomes.

The Reserve Bank of Australia reports that mortgage offset and mortgage redraw facilities now hold about 20 per cent of the total outstanding mortgage debt in Australia. That equals an average of more than two and half years of home loan repayments. If you are two and half years ahead on your mortgage, you are saving thousands in interest payable and maintaining a safety buffer in case you lose your job or can’t make repayments for a short time.

How does a mortgage offset account work?

An offset account can be 100 per cent offset against your loan or feature a lower percentage offset rate. 100 per cent offset is preferable for most borrowers. This means that every dollar you hold in the account lowers your loan balance owing by one dollar. A 50 per cent offset account lowers your loan amount owing by 50 cents for every one dollar.

An offset account does not lower your repayments. Repayments remain the same and therefore the time taken to repay the total loan will be reduced because less interest will accumulate.

Because the balance in the offset account brings down the total amount of interest due, more of your repayments go directly to repaying the original principal loan amount.

You may also save on tax because you are not earning interest in a savings account that must be included as income at tax time. And because home loan interest rates are higher than savings account interest rates, you will actually be receiving a higher net benefit than if your money was sitting in a standard savings account.

Mortgage offset pro-tip – turn a long mortgage into a shorter mortgage

Your repayments will not change regardless of how much money is held in the offset account. But you may be able to build a buffer, shorten the total time taken to repay the loan and save thousands in interest by considering a common offset strategy like this:

Take out a 30 year home loan, five years longer than the standard 25 year loan. Because the loan has a longer term, the monthly repayments are lower. Add an offset account and build up a healthy balance which lowers the interest owing, and therefore the total term of the loan, perhaps by five or more years. The advantage with this strategy is you have a ready balance of money available in your offset account if you need it.

You can use the Infochoice Home Loan Calculator to work out what your repayments might be on a 25 or 30 year home loan and what size loan you can afford.

How much does mortgage offset cost?

In the past, home loan features like mortgage offset and redraw (withdrawing extra money paid into the loan) was only available on package loans with higher fees and interest rates than standard variable home loans.

However increased competition in the mortgage market from smaller lenders means there are now plenty of great home loans with linked offset accounts charging about the same as the market leading lenders. Shop around, compare deals because you don’t need to pay a premium rate for a loan with an offset account.