What Is an Offset Account?

“What is an offset account?” You might ask. Here at Professional Lending Solutions we are here to answer your questions! The world of finance may seem daunting and even overwhelming at times so it’s very understandable that sifting through a lot of complicated articles about the topic can feel like a lot.

In this blog, we’ll outline what an offset account is as well as what an offset loan is and their respective relationships.

What is An Offset Account and Loan

Now, what is an offset account? it is a bank account that is linked to your home loan and acts like an everyday account. You can deposit and withdraw your savings and salary into the account. Its balance then is offset against the amount you owe on your home loan.

By consistently maintaining a higher balance in your offset account over time, you can reduce the interest you accrue on your home loan. The larger the balance and the longer the period, the greater the interest savings, potentially leading to faster loan repayment.

For example, if your home loan is $300,000 and you have $30,000 in your offset account, the interest you will be charged will be on a loan balance of $270,000.

Let’s see how that offset account works with a 5% interest rate. With a $300,000 loan and a $30,000 offset, interest is only calculated on $270,000. With an interest rate of 5%, the annual interest on the reduced amount would be $13,500 ($270,000 x 0.05). Without the offset, the annual interest on the full $300,000 would be $15,000 ($300,000 x 0.05). So, the offset account saves you $1,500 in interest each year. This translates to lower monthly repayments and faster progress towards owning your home outright.

You can obtain an offset feature available on variable rate home loans although there are lenders on the market who have an offset feature on selected fixed-rate home loans. Ask us to send you the details!

Benefits and Disadvantages of an Offset Account

Now you know what is an offset account, you need to take note that the advantages of an offset account are dependent on the amount of money within the account and the type of offset account that you have.

Benefits of an Offset Account

• Lower your interest: The money in your account can save you interest. The amount by which your interest is lowered also relies on the amount of money within your account.
• Financial goals are more accessible: An offset account can allow you to work towards other financial aspirations you might have.
• Boost your cashflow: An offset account is flexible and means your money is accessible anytime but even if taking money from your offset account can impact your accrued interest, you can still use your account for cash.

Disadvantages of an Offset Account

• Fees: Your offset account may come with its own monthly account fee and you can possibly pay a higher monthly establishment or maintenance fee.
• Accessibility: Variable home loans are often linked to offset accounts.