If you have a home loan, then a mortgage offset account, is a great place for your extra cash. It will help you pay off your home faster. With an offset account, you can save thousands of dollars and take years off your mortgage.

Need access to your funds? Not a problem. A mortgage offset account is an 'at call' cash account. There is no obligation to lock your funds in. An no penalty for making extra deposits or withdrawals. An offset account gives all the features of a cash account including:

Internet Banking
Access through ATMs
Direct Debits
Cheque books

How Does a Mortgage Offset Account Work?

You will not earn any interest in your offset account. The balance will be used to 'offset' the interest you are being charged on your linked home loan. If you owe $315,000 on your mortgage, and have $10,000 in a 100% mortgage offset account, then you will only be charged interest on $305,000.

Paying money into your Mortgage Offset Account, has impact on interest, as making extra repayments on your home loan. The balance which mortgage interest is charged = Mortgage Balance - Mortgage Offset Account Balance ($315,000 - $10,000 = $305,000).

The more money you have in your mortgage offset account, the less interest you will pay on your home loan. Saving interest on mortgage, is better than earning interest from a savings account for the following reasons:

The Interest Rate is Higher - The interest rate banks charge on loans, is higher than the rate they pay on savings accounts. A mortgage offset account, will save you more money than a savings account will earn you.
There is no additional risk - A mortgage offset account and a savings account, are both cash accounts. By using an offset account, you are increasing your return without increasing your risk.
You will pay less tax - Any interest you earn from a savings account, is part of your annual income, you will pay tax on it. There is no tax on the interest you will save from using your mortgage offset account.

How much will you save with an offset account?

Let's look at a hypothetical case to compare two borrowers, Mr. Offset, and Mr. Savings. For simplicity, we'll assume:

They each have a mortgage of $315,000 charging interest at 4.40%
They each have a savings account which pays 2.00%
They each have $10,000 to put in cash account
They both pay interest only on their home loans
They both have interest paid out of their savings accounts (so there is no compounding).
Mr. Offset puts his $10,000 in a mortgage offset account
Mr. Savings puts his $10,000 in a savings account
They both pay income tax at a rate of 30%

After 12 months, Mr. Offset would be $300 better off than Mr. Savings this is illustrated in table below:

Want to see how much an offset account can save you?  Click on this picture to go to our calculator — Want to see how much an offset account can save you? Click on this picture to go to our calculator

Mr. Offset has reduced the interest on his mortgage by $440, at tax time, he pays no additional tax. Mr. Offset used his $10,000, to improve his cash flows by $440. This is an after tax return of 4.40% on his cash

Mr. Savings has not performed quite as well. He earned $200 interest, but pays income tax of $60. Mr. Savings has used his $10,000 to improve his annual cash flows by $140. This gives him an after tax return of 1.40% on his cash.

From this example, we can see that by using a mortgage offset account, Mr. Offset has more than tripled the benefits of a savings account. You can use our Mortgage Offset vs Savings Calculator, to adjust the variables, and see how much a mortgage offset account will save you.

How much will a mortgage offset save me over the life of my home loan?

Let's use another hypothetical, this time Mr Offset:

Has a home loan of $315,000 at an interest rate of 4.40% (which does not change over the life of his loan)
Is making principle and interest repayments of $1,607 per month
Has $10,000 in his Mortgage Offset Account - this balance is constant for the life of his loan

Mr. Offset will pay off his mortgage almost 2 years faster and will save a total of $34,247 in total repayments. This is shown in the graph below:

See how much you can save with our mortgage offset calculator

Can a Mortgage Offset Account Work as a Savings Plan?

Let's assume that Mr. Offset wanted to save an extra $100 per month, and he put this in his mortgage offset account. We now have a case where:

Has a home loan of $315,000 at an interest rate of 4.40% (which does not change over the life of his loan)
Is making principle and interest repayments of $1,607 per month
Has $10,000 in his Mortgage Offset Account - this balance is constant for the life of his loan
He is depositing an extra $100 per month in his Mortgage Offset Account

By making regular contributions, Mr. Offset is gradually increasing his savings as the balance in his mortgage offset account grows. He will pay off his mortgage 4.6 years faster, and save $89,488 over the life of his loan. This is shown in the graph below:

The regular savings of $100 per month, have acted in the same way that additional mortgage repayment would. It means that Mr.Offset has further accelerated the repayment of his home loan. By using a mortgage offset account and a regular savings plan, he has saved almost $90,000 over the life of his loan.

Should I Use a Mortgage Offset Account, or just make additional repayments to my home loan?

Most Australian variable rate mortgages, allow you to make unrestricted additional repayments. Sending extra money directly to your loan account would have the same benefits as using an offset account. Rather than offsetting the balance, you are directly reducing it. You can access your surplus funds through your available redraw on your mortgage.

To determine if a mortgage offset account is better than additional payments you'd need to consider:

Accessibility - Mortgage redraw can take a few days to process, so if you want ready access to your funds, an offset account is better.
Redraw Fees - Some banks allow you to perform redraws free of charge with internet banking, others charge a fee
Offset Fees - Some banks charge a monthly fee for using a mortgage offset account, others provide this service free of charge.
Is your loan for investment? - If you have borrowed to invest, then your accountant will explain that for tax purposes, it is usually better to have a mortgage offset account.

If you have a home loan, then we hope that you are not keeping your cash in a savings account. Saving mortgage interest is better for you than earning interest. Whether you use a mortgage offset account, or pay directly into your loan, the benefits are there.

We hope this information was useful. We'd like to hear your feedback especially if you can share information on how you are paying off your home loan faster.