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WTF is an Offset Account?
June 3, 2015 .

An offset account is a ‘regular bank’ account that is linked to your home loan and can help reduce the interest charged on your mortgage, allowing you to pay it off sooner. An offset account means more of your monthly payment is going towards paying off the principal than paying off the interest attached to the loan. Through an offset account, you are effectively earning interest at the rate of your home loan (without paying tax) – a deal you will be hard pressed to replicate elsewhere.

How does an offset account work?

The best way to understand an offset account is to think of two extreme examples – Bill & Tony who both take out 20 year, $500,000 mortgages at a fixed 4.5%. Bill has $0 in his offset account and tony has $500,000 in his offset account through the life of his loan. Below is their repayment schedule for the first 12 months of the loan:

 Bill Tony
MonthRapaymentInterestPrincipalBalanceRapaymentInterestPrincipalBalance
1$3,163 $1,875 $1,288 $498,712 $3,163 $0$3,163 $496,837
2$3,163 $1,870 $1,293 $497,419 $3,163 $0$3,163 $493,674
3$3,163 $1,865 $1,298 $496,121 $3,163 $0$3,163 $490,511
4$3,163 $1,860 $1,303 $494,818 $3,163 $0$3,163 $487,348
5$3,163 $1,856 $1,308 $493,510 $3,163 $0$3,163 $484,185
6$3,163 $1,851 $1,313 $492,198 $3,163 $0$3,163 $481,022
7$3,163 $1,846 $1,318 $490,880 $3,163 $0$3,163 $477,859
8$3,163 $1,841 $1,322 $489,558 $3,163 $0$3,163 $474,696
9$3,163 $1,836 $1,327 $488,230 $3,163 $0$3,163 $471,533
10$3,163 $1,831 $1,332 $486,898 $3,163 $0$3,163 $468,370
11$3,163 $1,826 $1,337 $485,561 $3,163 $0$3,163 $465,207
12$3,163 $1,821 $1,342 $484,218 $3,163 $0$3,163 $462,044
1 Year Total $37,956$22,177 $15,782 $484,218 $37,956 $0$37,956 $462,044

With $500,000 in an offset account Tony pays $0 interest in the first year and would pay $0 interest throughout his home loan. Every dollar he pays to the bank goes to paying off the principal and therefore his 20 year loan would be paid off in 13 years.  This is contrast to Bill who would take 20 years to pay off the loan at a total interest expense of $259,000. Effectively the offset allows you to pay off the loan quicker and save on interest.

Of course no one has a 100% offset account (otherwise they probably wouldn’t get a mortgage). Even with smaller amounts the savings can be significant:

Impact of offset on $500,000 loan with a 4.5% interest rate

Size of offsetMortgage paid off in:Interest Saved
$25,00019 years35,000
$50,00019 years65,000
$75,00018 years91,000
$100,00017 years116,000

The benefits

You don’t need to be a rocket scientist to figure out the benefits of having an offset account – pay less interest and pay off your home loan sooner. A lot of offset accounts are also transactional which means you can move money in and out of the account at your leisure.

“You don’t get rich by writing cheques”

The big 4 banks don’t make $8bn of profit every year because they hand out interest savings to every Tom, Dick and Harry.  Offset accounts often have higher monthly fees attached to the account and also require a minimum balance to be kept in the account. There are also a lot of humble individuals (include yours truly) out there who do not have $50,000 (after the $120,000 dollar deposit mind you…) to sit and accrue interest savings.

Having said that if you are in the fortunate position of having the extra cash, putting a bit away each month to the offset account is a very good option.

The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.

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