Offset Account Calculator

How an offset account works

An offset account is an everyday transaction account that sits beside your home loan. The bank does not pay you interest on it. Instead it takes the balance off your loan before it works out the interest you owe that month. Keep $20,000 in the offset against a $650,000 loan and the bank charges you interest on $630,000.

Your repayment does not change. The split does. Less of each repayment goes on interest, so more of it comes off the balance, and the loan finishes earlier. That is where the saving comes from.

Offset or redraw

Redraw is the money you have already paid ahead on the loan. An offset is your own cash sitting in a separate account. They save you the same interest. The difference is how easy the money is to get back.

Redraw can be reduced, frozen or removed by the lender, and several Australian banks have done exactly that when conditions tightened. The money in an offset is in your account. You can spend it from the card. For anyone keeping an emergency fund, that difference matters more than the rate.

There is also a tax angle if the property is an investment. Paying money into the loan and pulling it back out later can change what part of the interest is deductible. Money in an offset does not. Ask your accountant before you move anything, because the answer depends on how the loan was set up.

What an offset costs

Most lenders do not give you one for free. You either pay an annual package fee, usually $300 to $400, or you sit on a rate a little above the lender's cheapest no-frills product.

That is the sum worth doing before you sign anything. At 6 per cent, $10,000 in the offset saves you $600 a year. If the package fee is $395 and your average balance is only $5,000, the offset is costing you more than it saves. If you keep a real balance in there, it wins easily.

The partial offset trap

Not every account called an offset takes the full balance off. Some, especially on fixed rates and on some investment products, only count part of it. A 40 per cent offset on $20,000 behaves like $8,000.

Ask the lender one question: is it 100 per cent offset, and does it stay 100 per cent if I fix the rate. Plenty of fixed loans drop the offset entirely for the fixed period.

How many offsets can you have

Some lenders allow one account per loan split. Others allow several against the same loan, which lets you keep a bills account, a holiday account and an emergency fund all working against the interest. It costs nothing extra and it is worth asking for, because most people never do.

Where your salary lands matters too. Having your pay go into the offset and paying everything on a credit card you clear each month keeps the balance higher for longer, and the bank works the interest out daily.

What this calculator does not do

It assumes your rate stays put. Rates move, and the saving moves with them, up as well as down. It also assumes the money you say you are adding each month actually stays there. An offset only works on the balance that sits in it.

It does not include the package fee or any account fees, so take those off the saving to get your real number.

Questions people ask

Does an offset account reduce my repayment?

No. The repayment stays the same. What changes is how much of it is interest and how much comes off the loan, so you finish earlier.

Is an offset better than paying extra off the loan?

They save the same interest. The offset keeps the money available to you, the extra repayment does not, unless the loan has redraw and the lender leaves it alone. For an investment property the offset is usually the safer choice on tax grounds, but check with your accountant.

How much should I keep in an offset?

As much as you can leave there. There is no minimum and no maximum. Every dollar counts from the day it lands, because interest is worked out daily.

Do I still get interest on the money?

No, and that is the point. The saving comes as interest you do not pay, which is not taxed. Interest earned in a savings account is. On the same balance the offset usually comes out ahead for anyone paying tax at 30 per cent or more.