An offset account is a savings or transaction account that is linked to your home loan. The balance in this account ‘offsets’ daily against the balance of your home loan before interest is calculated. An offset account can help you cut years off your home loan term and save money on interest, without even making an extra repayment.
Here’s an example.
If your mortgage balance is $200,000 and you’re holding $20,000 in your 100% offset account, you’ll only have to pay interest on a mortgage balance of $180,000.
Because your home loan interest is calculated daily, every dollar in your offset account can save you money in interest. That means more of your repayment goes towards paying down the principal, helping you to repay your home loan faster.
Sound appealing? There are two basic types of offset account to choose from. With a 100% offset account, all of the money in your account is offset against your mortgage balance, whereas a partial offset account only offers a lower interest rate on the portion of your mortgage that equals its balance. Obviously, this is not as effective as a 100% offset account.