Firstly, you might be wondering what an offset account is. An offset account is a transaction account linked to your home loan. You can make deposits or withdraw from is as you would with your everyday transaction account.

The difference between an offset account and an everyday account is that when you have money in an offset account it reduces the amount of interest that is charged on your home loan. The bigger the balance and the longer the period, the less interest you’ll pay. Which in turn could help you to pay your loan off sooner.

Here is an example of how an offset account works.

• Let’s start with a $350,000 home loan.
• You then deposit $50,000 into your offset account.
• You’ll now be charged interest on $300,0000 and not the whole loan amount of $350,000.
• This will happen as long as the $50,000 balance stays in the offset account.

An offset account can be used in different ways. Some like to have their pay deposited into the offset account and use it as their everyday account. While others may use it as their savings account.

In an offset account, your money is going to work harder because the interest rate you pay on a home loan is usually higher than the interest you earn in a savings account.

Another plus is that the interest you save by using an offset account won’t be considered income. Which means it won’t be taxed. Whereas the interest you earn on a savings accounts will generally be considered incomes and therefore will be taxed.

Redraw facilities work in a similar way to offset accounts, but there are key differences. Redraw facilities tend to be less flexible, but can still have their advantages.

To sum up

• An offset account is a transaction/everyday account linked to your home loan
• It can help reduce the amount of interest paid on your home loan and in turn could then help you pay it off sooner.
• The more money in the offset accounts, means less interest you will pay on the home loan.