Compare mortgages with offset accounts

A mortgage offset account is a transaction account that is linked to your home loan. You can use it like you would use any other bank account, which includes being able to withdraw from it. 

An offset account allows you to lower the overall balance of your loan without having to make extra repayments by 'offsetting' the interest you pay. It won't lower your interest rate, but it will count towards your home loan balance which can help reduce the life of the loan. 

Essentially, it isn’t any different to a regular transaction or savings account, but when linked to your home loan an offset account is a way to reduce the interest you are charged. 

An offset account works by effectively lowering the overall balance of your home loan while still allowing you to access the funds. Any money you hold in your offset account is counted against the debt you owe your lender. This means you will pay less interest over the life of your loan, because your lender will be calculating interest on the value of the loan, minus whatever funds are in your offset account.

The main attractor of an offset account is that it can be used to reduce the life of the loan without affecting how you access the money. An offset account is essentially an everyday bank account and most lenders will allow you to use it as such, including the ability to withdraw funds from an ATM using a bank card or EFTPOS terminal. 

Comparatively, if you make extra repayments against your home loan, or use a term deposit, the withdrawals you have access to may be limited and you may face additional fees. 

Typically, lenders only offer an offset facility attached to a variable loan, however some lenders do offer fixed rate home loans with an offset option or allow you to use a partial offset. 

An offset account works by offsetting the interest against your loan principal. For example, if you had a mortgage of $500,000 and an attached offset account with a balance of $100,000, when your lender calculates the interest owed, they would base it on a $400,000 balance. For as long as the additional funds are in your offset account, you will be charged less interest. 

Keep in mind that the minimum balance in your home loan offset account will need to be over a certain value to make a significant impact on your interest payments. If you are using the account as a savings account this may not be a problem, but if you want to use it like an everyday bank account, you will need to be wary of how low the offset account balance falls. 

While having an offset account could potentially save you thousands in interest repayments over the life of your loan, there may be fewer loan products available with this feature, so it’s important to shop around. 

Some lenders may charge a monthly or annual fee on your offset account, meaning the account might not provide as much value. But there are also plenty of mortgage lenders that offer free offset accounts, where you won’t need to pay an extra fee, which may allow you to enjoy more interest savings on your home loan and clear your debt faster, without having to worry about as many extra costs. 

But even if a home loan doesn’t charge an extra fee specifically for the offset account, that doesn’t mean the offset account is completely free. Sometimes a home loan with a free offset account will have a higher interest rate or charge a higher annual fee than the next home loan. Even with the potential interest savings, you could end up paying more for a home loan with an offset account than you would for a more basic “no-frills” home loan with a low interest rate and no fees.  

To get a better idea of a home loan’s overall cost, you can calculate the savings and compare them to any additional account keeping fees. You can also look at each loan’s comparison rate, which combines the loan’s interest rate with the cost of its standard fees and charges, so you can tell at a glance which loans may cost you more in total.

Typically an offset account will not lower your monthly repayments, but it does mean more of your money will go towards paying down the loan principal as you are paying less interest. While your monthly repayments may not change, your loan term should decrease as you are paying your loan off faster.

Generally speaking, most lenders only offer a home loan offset account with a variable home loan. Some lenders may offer split loans with partial offsets, where a portion of your loan is fixed and the other is variable, and there are some lenders who offer fixed loans with an offset, but they are fewer and farther between and you may pay the price in additional monthly fees or higher interest rates.

No, an offset account and a redraw facility are two different things. While both options can reduce the amount of interest you pay and assist you in paying off your loan balance faster, they have different features. 

An offset works like a transactional account and allows you to deposit or withdraw money as you wish. A redraw facility sits inside your home loan and allows you to withdraw additional repayments you have made. This means you may not be able to access the funds from an ATM or using a debit card. Some lenders may also put additional stipulations on a redraw facility, such as limiting the amount you can withdraw. There are also different tax implications between an offset and a redraw facility, so it’s best to look at all the options and work out which suits your financial goals. 

It’s important to research and compare all your options when choosing a home loan with an offset account. Thankfully, there are a range of comparison tools available that can help take the hassle out of this process, including:

Comparison rates

Whether you're looking for a more traditional home loan or one with specific features like an offset account, the basic principles are still the same. A comparison rate for a product looks at not just the advertised rate, but the bigger picture, including upfront and ongoing fees. 

This is particularly important when you are considering a mortgage product that may incur additional fees, as an offset can. If the comparison rate is significantly higher than the advertised home loan interest rate you can assume the lender charges significant fees and may not be the best option. 

Comparison tables 

Comparison tables help you compare apples with apples by allowing you to filter and view a range of offset accounts within your specific parameters. You can use a comparison table to help you sort a selection of home loans by features including lowest rates or additional features. This can help you make a shortlist of options for your home loan package. 

RateCity’s comparison tables also give you the option of comparing offset accounts from a variety of lenders that offer them, including the big four banks. Even if you have existing products with one lender, it's worth considering the other options out there to make sure you end up with the best loan for your situation. 

Additional features

Offset accounts come in many different forms, from variable rate home loans to partial offset and others. When looking for the best home loan for you, it's important to consider all the options and think about how they would fit into your finances. Some lenders are very strict around what type of loans they will pair with an offset, but if you shop around you can find a lender that ticks all your boxes. 

Home loan calculators

Home loan calculators are another tool to help you in your search for an offset account. As well as knowing that you want an offset, you will still need to know the other home loan basics, like how much you may be approved to take out in a mortgage. RateCity’s Borrowing Power Calculator may also be able to point you towards lenders that may approve borrowers for said home loan amount with the features you require. 

Finally, the Mortgage Repayment Calculator may help you to narrow down your shortlist of home loan options based on which best suits your budget. Enter your details, including interest rate, loan amount, borrower type (owner-occupier or investor),  repayment type (principal & interest or interest only) and repayment frequency (weekly, fortnightly or monthly repayments) to see your estimated mortgage repayments, including interest repayments. This will help you get an understanding of what sort of savings you could achieve with an offset account and how it will impact your finances.