Offset Account Calculator
Calculate how an offset account can impact your home loan using our calculator below.
What is an Offset Account ?
An offset account is a savings or transaction account linked to your mortgage. The balance in this account is offset against your home loan, reducing the amount of interest you pay.
Having an offset account may help you to pay off your home loan ahead of its term and save thousands of dollars over the life of the loan, simply by depositing all your regular income and earnings into your offset account.
These accounts may come with higher costs, so it’s important to crunch the numbers to make sure you’re ahead in the long run.
Here's a breakdown of how it works:
How an Offset Account Works
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Linking to Your Mortgage:
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An offset account is a separate transaction account directly linked to your home loan.
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Interest Calculation:
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Instead of calculating interest on the full mortgage balance, the lender calculates interest on the mortgage balance minus the offset account balance.
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For example, if you have a mortgage balance of $300,000 and an offset account balance of $50,000, you only pay interest on $250,000.
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Savings on Interest:
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By reducing the balance on which interest is calculated, you save money on interest payments.
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These savings can be substantial over the life of the loan.
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Benefits of an Offset Account
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Interest Savings: Reduces the amount of interest you pay on your mortgage, potentially saving you thousands of dollars.
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Flexibility: Funds in the offset account can be accessed anytime, providing flexibility for your financial needs.
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Tax Efficiency: The interest saved is not considered taxable income, unlike interest earned in a traditional savings account.
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Debt Reduction: Helps in reducing the overall loan term if you keep a substantial balance in the offset account.
Example Scenario
Let’s say you have:
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A mortgage balance of $400,000
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An offset account balance of $50,000
Instead of paying interest on $400,000, you only pay interest on $350,000. This means your monthly interest payments are lower, helping you pay off your loan faster and save money.
Here is an explainer graph for an offset account. It visually demonstrates how the offset account balance reduces the net loan balance:
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Mortgage Balance: This represents the total amount you owe on your home loan being $400,000
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Offset Account Balance: The amount of money you have in your linked offset account being $50,000
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Net Loan Balance: The effective loan balance you are charged interest on, calculated by subtracting the offset account balance from the mortgage balance being $350,000.
In this example, the $50,000 in the offset account will save $159,073 over the 30 year loan term, thus reducing the overall term by almost 6 years.
Things to Consider
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Account Fees: Some offset accounts may come with monthly fees.
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Interest Rates: Ensure the interest rate on your mortgage with an offset account is competitive.
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Discipline: Maximizing the benefits of an offset account requires keeping a good balance in the account.
An offset account can be a powerful tool in managing your mortgage and reducing interest payments. It’s a smart option for those looking to make the most of their savings while paying off their home loan.