“Mortgage offset accounts”, “offset home loan”, “interest offset account” or simply “offset account” — they are all interchangeable labels for the same financial product provided by banks. It is essentially a savings account that is linked to a loan account.

An offset facility contains two bank accounts: (1) a transaction account (meaning you have access to the funds) that is linked to (2) a loan account. The transaction account offsets the interest that is charged to the loan (hence the consistent use of the term “offset”).

So unlike a straight-out loan arrangement, the offset account also works like a regular savings account. Also any notional interest on savings may be earned at the same rate as the linked loan.

Savings in your offset account can help to reduce the loan principal over time, allowing you to pay off your loan sooner or build up equity. Take for example the scenario of a couple with a $100,000 mortgage (not realistic, but used just for simple arithmetic) and $10,000 in a linked offset account:

  • the principal on the $100,000 loan is reduced by the $10,000 offset account to $90,000
  • as a result, interest only accumulates on the $90,000 balance of the loan
  • repayments continue to be made on the entire $100,000 principal and applicable interest
  • savings in the offset account are actively working to reduce the loan, while repayments are working more effectively to reduce both the principal and interest it attracts. Readmore