Home Loans 101

An offset account is a transaction account attached to a home loan. The balance in the offset account is taken away from the principal remaining on the loan for interest calculation. Your repayments will stay the same with an offset account. What will change is the proportion of the amount of your repayment that goes towards the loan amount vs the amount that goes towards the interest component. Because the offset account lowers the interest due on your loan, more of your repayment goes towards the actual loan amount, known as the 'principal'.

For illustration purposes, let’s say your monthly repayment is $2000 -> of which $1500 is interest, and $500 is Principal. So you might have a $200,000 loan and $15,000 in your offset account. Because of your offset account, you will only be charged interest against $185,000. You still pay $2000 per month, but because of the offset, $1400 is going towards Interest and $600 is Principal. So in this example, a bigger portion of your monthly repayment is going towards paying down the loan because you are being charged interest on $185,000 instead of $200,000. Of course, if you take the $15,000 out to buy a car, then there will be no interest saving! Usually, a bank will charge a fee for this feature, and it can range from $5pm to $395p.a. To justify this fee, this usually works well with larger loan sizes and reasonable amount of surplus income.