An offset account is typically a savings account with the option to make deposits and withdrawals just like any other account. The difference is that an offset account is linked to your home loan, and can help you to reduce the interest charged on your loan, which allows more money available to paying off your home loan sooner.
The most effective account to repay your home loan is a fully transactional 100% offset loan account. Most lenders provide an option to link a credit card to the account.
How An Offset Account Works
A home loan offset account offsets the interest charged on your mortgage.
For example, you have a home loan balance of $450,000 and an offset account balance of $50,000. When your daily interest is calculated, the lender will offset your loan balance with your offset account balance, meaning that they would only calculate interest on $400,000.
Your loan repayment/ commitment will remain the same, however less of the repayment will be used to pay the interest and more will be used to pay down the principal which will essentially pay your home loan off quicker.
How to get the best out of your Offset Account
Some people with a home loan offset account don’t know or not sure how to get to best out of their account.
To use your offset account effectively, you need to maximise the money/savings in the account at all times. You should have your salary paid directly into the account along with any other income and have all your savings transferred to this account.