What Is a Mortgage With an Offset Account?

A mortgage with an offset account helps to calculate your offset account balance against your mortgage balance.

This helps you save on mortgage interest, which significantly alleviates the burden on mortgage holders in these times of rising mortgage stress in Australia.

Today, we’re taking you through everything you need to know about getting a mortgage with an offset account, helping you save money on interest so that you can hopefully pay off your mortgage faster.

What Is a Mortgage With an Offset Account?

As an unbiased mortgage broker, we always help out our potential customers with effective ideas that could help them save money on the mortgage they’re about to get.

And getting a mortgage with an offset account is one of those tips. It’s also one of the questions we get asked the most—what is a mortgage offset account?

We’ll define it in the best possible way. A mortgage offset account is an everyday/transactional bank account linked to your mortgage. 

The balance in this account offsets the mortgage, which means the interest on your mortgage is only calculated on the final mortgage balance (mortgage - offset account balance = final mortgage balance).

Here’s an example to help you understand better…

Assume that you have a $500,000 mortgage. If you link an offset account with a $50,000 balance to this mortgage, the interest is then only calculated on the final mortgage balance of $450,000 ($500,000 - $50,000).

How convenient, right?

The best part is that this mortgage offset account is a daily transactional account, so you can use that balance whenever and however you’d like to. It’s just like a normal savings account, but with better benefits.

Benefits of a Mortgage Offset Account

Apart from the fact that an offset account saves you money on mortgage interest, it also comes with a myriad of other benefits. Here are all the different ways a mortgage offset account can be advantageous for you.

• Interest Savings: You can save on mortgage interest since the amount calculated for interest is less as the offset account balance offsets the mortgage balance.

• Faster Loan Repayment: Saving on interest means lower monthly repayments, which enables you to pay extra every month to close off the loan faster.

• Flexible Access to Funds: Your mortgage offset account carries the same features as a normal savings account, which allows you to access the offset account balance whenever you want.

• No Need to Change Spending Habits: Money stays "liquid" in the offset account.

• Tax Benefits: In Australia, interest saved through offset accounts is not taxable, while interest earned in regular savings accounts is subject to tax.

As you can see, interest savings are not the only benefit you get with an offset mortgage account. That’s why we constantly suggest our customers get a mortgage with an offset account facility.

The amount of money we’ve saved for our customers so far proves that.

Potential Drawbacks of an Offset Mortgage

When it comes to the drawbacks, we’ve seen a lot of customers say the benefits of a mortgage with an offset account far outweigh the drawbacks. But, to each their own, so here are the 4 drawbacks you need to be aware of.

• Higher Fees and Interest Rates: Offset mortgages often come with higher fees due to the added benefits you get by linking an offset account.

• Need for Consistent Savings: To maximise benefits, you must maintain a healthy offset account balance.

• Not Useful With Low Savings: Not ideal for those with low savings since the interest amount you save with a low offset account balance may be far less than what you could earn in interest with a savings account.

• Availability Constraints: Offset accounts are more common with variable-rate loans, although some Australian lenders may offer partial offset on fixed loans.

If anything, the customers who did have a problem with offset mortgages were how it required a fairly high amount of account balance. If your condition is similar, a mortgage with an offset account might not be the ideal choice.

Who Should Consider a Mortgage With an Offset Account?

Now that we have concluded who it’s not for, let’s look at the type of future homebuyers who would be the ideal fit for getting a mortgage with an offset account.

• People With Substantial Savings: Offset mortgages are ideal for those who maintain a high balance in their savings (use these savings on your offset account instead.)

• Borrowers Who Value Flexibility: Those who want access to their money at any time while still enjoying the benefits of saving on mortgage interest.

• High-Income Earners and Self-Employed Individuals: With fluctuating cash flow, an offset mortgage provides flexibility while still granting you the benefit of tax-free savings.

If you check all of these boxes, you’ll get significant savings and other benefits compared to not using an offset mortgage account or using a savings account.

In that same sense, if you even only check any one or two of these criteria, you’re still going to benefit from getting a mortgage with an offset account.

Things to Consider When Choosing a Mortgage Offset Account

If you’ve decided to get a mortgage with an offset account, your next step is to take a few things into consideration to make sure you’re able to fully utilise the benefits of an offset account.

From ensuring eligibility to understanding potential limits associated with an offset account, here are 7 key things to consider before getting that mortgage.

• Ensure your mortgage is eligible for an offset account.

• Carefully compare the potential interest savings with the fees or higher interest rates associated with offset mortgages to ensure the offset option is truly cost-effective for you.

• Consult with your lender to see if there is a minimum balance requirement on the offset account.

• Verify that 100% of your offset account balance is calculated against the mortgage.

• Verify there is no maximum limit to the balance you can keep in the offset account.

• Consult with your lender to see if there are any limits to the amount or types of transactions you can make with the offset account.

• Ensure there’s good ease of access to the offset account balance in case of emergency.

While offset accounts are commonly offered by Australian lenders, the terms and conditions vary, so it’s vital to bring these things up with yours. Make sure the conditions are more in your favour if you want to utilise the benefits of an offset account to its fullest.

We highly advise that you seek professional advice from a licensed mortgage broker or a financial adviser to find the right solution for your specific circumstances.

Offset Mortgage vs. Redraw Facility

An offset account and redraw are both different features or facilities you get on top of your mortgage.

Getting a mortgage with an offset account gives you great flexibility with your money while helping you save on mortgage interest. You can use your offset account just like a regular bank account, where you’re free to take money in and out whenever you want to.

All this while, the balance in your offset account is calculated against your mortgage, which makes the interest only applicable to the remaining mortgage balance.

However, a redraw facility works in a slightly different manner. It’s a feature associated with mortgages that allows you to withdraw the extra amount you pay on top of your minimum monthly repayments.

A mortgage without the redraw facility won’t let you do this withdrawal. That means any extra fund you pay towards your mortgage is settled right then and there, so you can’t take it out in the future.

But just like an offset account, a redraw facility also helps you save money on a mortgage. Because even though you can redraw the extra payments you made, those extra payments will count towards your mortgage balance, and interest is only applicable on the remaining mortgage.

When you redraw, the lender will adjust the interest amount depending on the latest mortgage balance.

While they both help you save money, an offset account is evidently a better choice, as it also gives you that extra flexibility with money.

Mortgage Offset Account: Frequently Asked Questions

What is a mortgage with an offset account?

A mortgage offset account is a transactional account you can link to your mortgage. It works just like a regular bank account—you can take money in and out as usual.

How does an offset mortgage reduce interest payments?

The offset account balance is calculated against the mortgage, making the mortgage interest only applicable on the remaining mortgage balance.

Do all lenders offer offset mortgages?

No, not all lenders offer mortgages with an offset account. If you’re interested in getting an offset mortgage, make sure to consult with your lender to see if they do have that option.

Can I withdraw money from an offset account?

Yes, you can deposit or withdraw money from your mortgage account whenever you want to. However, keep in mind that the conditions vary by lender, and it could be possible that your lender has limits on the amount of money you can withdraw or keep every month.

Kindly ask your lender if there are such conditions associated with the offset mortgage they provide.

Is an offset mortgage worth it?

The benefits of an offset mortgage are significantly amplified for people who value flexibility with money, have substantial savings, and have high income. If you fit into these criteria and you wish to save money on your mortgage, then yes, an offset mortgage will be worth it for you.

In fact, it will help you big time even if you check any one or two of these criteria. This is why we recommend it to all our customers—and they love the benefits that come with it!

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