The short answer is yes. The idea behind an offset account is to reduce the principal owed on your home loan. An offset account qualifies as a type of transaction account linked to your mortgage by the lender. As such, the funds deposited into your offset account act as leverage against your mortgage principal.

For instance, if you owe $400,000 on your mortgage and have $50,000 into your offset account, you will only be charged interest on the sum of $350,000, i.e., the difference between the mortgage principal and the balance in your offset account. (Note, this only applies if you’ve opted for a 100% offset account. More on this later.)

Because you’re now paying interest on a smaller amount, you are effectively reducing the term and overall cost of your home loan. And the longer you maintain a healthy offset account balance, the greater your interest savings.

A decent offset account could save you thousands – potentially even tens of thousands – in interest over the term of your mortgage.

For example: You have a loan of $400,000 with $50,000 in your linked offset account, which you started only two years after taking out your home loan. Your loan is subject to monthly repayments over a 25-year term at an interest rate of 3% per annum.

You would cut your loan term by approximately four years and save almost $44,000 in interest. If you decided to supplement your offset account balance by, for example, linking it to your salary, you could save even more.

No, you cannot earn interest on an offset account. The primary goal of such an account is to save you paying more interest on your home loan than is necessary.

An account that earns you interest is typically a savings type account, where the amount of interest earned is calculated based on your account balance up to a given limit. Savings accounts usually offer much lower rates compared to the rates provided by home loans. You are also legally required to pay tax on any interest earned as it is considered income.

While you may earn a nominal amount of interest courtesy of your savings account, you can put that money to much better use in an offset facility. Think of it as earning a moderate amount of interest, which is subject to tax, versus saving thousands of dollars by putting those same funds to work in an offset account.

Our above examples are based on your having a 100% offset account, i.e., where 100% of the account’s balance is leveraged against the loan amount.

Conversely, a partial offset account only cuts the amount of interest you’re charged by a percent of the balance in your offset account. Let’s say you still have a mortgage of $400,000, but a 50% partial offset account with a balance of $50,000, you will be charged interest on the sum of $375,000, i.e., the difference between the mortgage principal and 50% of the balance in your offset account.

That’s why partial offset accounts tend to be less popular and generally less effective at helping you pay off your home loan faster. Ideally, you want a mortgage with a 100% offset account.

While they share some features and are quite often bundled together, offset accounts and redraw facilities do have some key differences.

Redraw facilities are typically only available with variable rate home loans. The advantage of a redraw facility is that it allows you to make extra repayments toward your mortgage and redraw these payments if necessary.

For example: If, over time, you contributed an additional $50,000 over and above the minimum payment, you could withdraw the same amount at a later date if you need the money. You could could use this money for things such as renovations, rather than taking out a whole new loan to cover this expense.

Think of it like a savings account, but it's working like an offset account with the extra funds being used in your interest calculations and working towards brining your interest down.

How flexible a redraw facility is differs from lender to lender. Some may allow you to redraw the funds online and without delay. Other lenders require you to make an application before withdrawing funds. Some may charge a withdrawal fee, while others offer “unlimited fee-free redraws,” enabling you to easily tap into your funds whenever suits you.

It’s relatively common for home loans with offset accounts to charge slightly higher interest rates and fees. However, this isn’t always the case. That’s why it’s crucial to do your homework and select a home loan/offset account option with the lowest rates and fees.

Offset accounts are quite readily available. It should be simple enough to find at least one suitable home loan/offset account option when shopping around for a mortgage, whether from one of the four major banks or a smaller mutual bank. Your mortgage broker can assist with finding the best lender for your needs with an unbiased approach to products.

However, as previously stated, not all offset accounts are created equal. Some lenders will offer offset accounts with higher interest rates or fees, limited redraws, or clunky application processes.

In a perfect world, you want an offset account that provides the convenience of a combined 100% redraw offset facility. That means 100% of the funds are used to offset your loan balance, and you have full redraw access via online banking, ATMs, and a dedicated VISA debit card. This loan is also ideally subject to no monthly or ongoing costs.