See exactly how much interest an offset account saves you over the life of your loan. An offset account reduces the balance your interest is calculated on — the more you keep in it, the less interest you pay.
An offset account is a transaction account linked to your home loan. The balance in this account is "offset" against your loan balance when calculating interest. If you have a $600,000 mortgage and $50,000 in your offset account, you only pay interest on $550,000. Your repayment amount stays the same, but more of each payment goes toward reducing the principal — which means you pay off the loan faster and pay less total interest.
Unlike a redraw facility, an offset account gives you instant access to your funds without any restrictions or fees. You can use it as your everyday transaction account, have your salary deposited into it, and spend from it normally. The key is keeping the average balance as high as possible, since interest is typically calculated daily.
A full (100%) offset account reduces your loan balance dollar-for-dollar. A partial offset account only offsets a percentage (commonly 40-50%) of the balance. Most competitive home loans now offer full offset, and partial offset products are rarely worth considering. If your lender only offers partial offset, the benefit is significantly reduced and you should compare the overall cost against a full offset product from another lender.
Both reduce interest, but they work differently. With an offset, the money is in a separate account and remains yours — the lender cannot restrict your access. With redraw, extra repayments are applied to the loan itself and the lender may impose conditions on withdrawals (some require minimum redraw amounts or charge fees). For investment properties, the distinction has important tax implications: an offset account preserves the tax-deductible status of your interest, while using redraw and then reusing the funds for personal purposes can create complex tax issues.
Tax-equivalent return: With a mortgage rate of 6.5%, every dollar in your offset account effectively earns 6.5% tax-free (because you avoid paying 6.5% interest). To match this in a savings account, you would need to earn approximately 9.3% before tax (at the 30% marginal rate). Offset accounts are almost always the best use of spare cash while you have a mortgage.