How to Save Thousands on Your Mortgage with an Offset Account
—Without Making Extra Repayments
For many homeowners, a mortgage is the largest financial commitment they will ever make.
The idea of paying off that debt faster and saving money is appealing, but the common advice to make extra repayments isn’t always feasible.
Luckily, a financial tool allows you to save thousands on your mortgage without making extra repayments: the offset account.
In this blog post, we’ll explain how offset accounts work, provide detailed examples, and demonstrate how you can significantly reduce the interest on your mortgage and shorten the loan term without making extra repayments.
Section 1: Understanding the Basics—What is an Offset Account?
An offset account is a transactional or savings account linked to your mortgage. The balance in this account directly offsets the amount of interest charged on your home loan. Instead of earning interest on the money in your offset account like a traditional savings account, the funds reduce the amount of interest you pay on your mortgage.
The more money you keep in the offset account, the less interest you’ll have to pay on your mortgage. The best part is that you don’t need to make extra mortgage repayments to benefit—you just need to keep money in your offset account.
How It Works:
- If you have a mortgage balance of $400,000 and $20,000 in your offset account, you will only be charged interest on $380,000 ($400,000 – $20,000).
- This reduces the amount of interest you pay, allowing more of your regular repayment to go toward paying down the principal (the loan balance).
By reducing your interest charges, an offset account can help you save money and pay off your mortgage faster—without any additional out-of-pocket costs.
Section 2: The Mechanics of an Offset Account
To understand the full power of an offset account, let’s look at the two main ways it benefits homeowners:
- Interest Savings:
By reducing the amount of interest charged on your loan, an offset account reduces your overall loan costs. The more funds you have in the account, the more you save. - Faster Mortgage Payoff:
With less interest to pay, more of your standard mortgage repayments go toward paying off the loan principal. This effectively shortens your loan term without the need for additional repayments.
Example 1: Mortgage Savings with an Offset Account
Let’s say you have a 30-year mortgage with a loan amount of $400,000 at an interest rate of 4% per annum. Without an offset account, your monthly repayment would be approximately $1,910.
Now, imagine you keep an average balance of $20,000 in your offset account. Here’s how it would impact your mortgage:
- Loan amount: $400,000
- Offset account balance: $20,000
- Effective loan amount: $380,000 (the balance on which you’ll be charged interest)
Without the offset account, you would pay approximately $287,478 in interest over 30 years. But with $20,000 in your offset account, your interest payments would drop to approximately $272,838.
That’s a savings of $14,640 over the life of your loan—without making any extra repayments!
Section 3: Compound Savings Over Time
The longer you maintain a balance in your offset account, the more interest you save. Even small balances can result in significant savings over the life of your mortgage. The more you contribute to your offset account, the greater the compounding effect over time.
Let’s extend our previous example and explore what happens when you increase the balance in your offset account:
Example 2: Higher Offset Account Balance = More Savings
If you’re able to increase your offset account balance to $50,000, the savings become even more substantial:
- Loan amount: $400,000
- Offset account balance: $50,000
- Effective loan amount: $350,000
By reducing the effective loan amount to $350,000, the total interest paid over 30 years would be around $251,966.
This results in $35,512 in interest savings compared to not having an offset account. Essentially, you’re paying off the loan faster and with fewer interest charges, just by keeping money in your offset account.
Section 4: Offset Account vs. Extra Repayments
It’s essential to understand how an offset account compares to making extra mortgage repayments. While both strategies can reduce your interest payments and loan term, an offset account provides flexibility that extra repayments do not.
Flexibility of an Offset Account:
- The money in your offset account remains accessible. You can withdraw it at any time for emergencies or planned expenses.
- Extra mortgage repayments, while effective, often lock your funds into the loan, making it harder to access without refinancing or using a redraw facility (which may come with fees and limitations).
Example 3: Comparison of Extra Repayments and an Offset Account
Let’s compare the impact of putting $20,000 toward extra repayments versus keeping that amount in an offset account.
- Scenario 1: Extra Repayments
- You make a one-time extra repayment of $20,000.
- Your mortgage principal reduces to $380,000, and you save on interest accordingly.
- The extra repayment is locked in, and you won’t be able to access those funds unless you use a redraw facility (which may incur fees).
- Scenario 2: Offset Account
- You deposit $20,000 into your offset account.
- Your effective loan amount becomes $380,000, and you save on interest as if you had made an extra repayment.
- However, the $20,000 remains available for you to withdraw or use as needed.
Both strategies save you on interest, but the offset account offers the additional advantage of liquidity—you can use the funds whenever you need them while still benefiting from reduced interest.
Section 5: The Power of Compound Interest Savings
As mentioned earlier, the savings from an offset account compound over time. The more money you keep in your offset account, the greater the impact it has on reducing the interest you pay and shortening the life of your mortgage.
To better illustrate this, let’s use a graph to visualize how different offset balances can affect the total interest paid over the life of a 30-year mortgage.
Graph 1: Impact of Offset Account Balances on Interest Savings
| Offset Account Balance | Total Interest Paid | Interest Savings |
|---|---|---|
| $0 (No Offset) | $287,478 | $0 |
| $20,000 | $272,838 | $14,640 |
| $50,000 | $251,966 | $35,512 |
| $100,000 | $216,698 | $70,780 |
From the graph, you can see how increasing the balance in your offset account dramatically reduces the total interest paid over the life of your mortgage. The higher your offset balance, the more interest you save—without ever needing to make extra repayments.
Section 6: Making the Most of Your Offset Account
To maximize the benefits of your offset account, consider the following tips:
- Deposit Your Income: Have your salary or other income deposited directly into your offset account. Even if it’s only in the account temporarily, every dollar helps reduce your interest.
- Use It as a Spending Account: Treat your offset account like a regular transactional account. Pay bills, groceries, and other living expenses from it, but aim to maintain as high a balance as possible.
- Add Windfalls: Any extra money you receive—such as tax refunds, bonuses, or gifts—should be placed in your offset account to boost your balance and save more on interest.
- Review Regularly: Make a habit of checking your mortgage and offset account balances periodically to ensure you’re optimizing your savings.
Example 4: Using the Offset Account for Daily Spending
If you typically maintain a checking account with a balance of $5,000 to cover monthly expenses, moving this amount to your offset account can provide extra savings on your mortgage.
While the money is still available for spending, it will help offset your mortgage balance, reducing your interest payments.
Section 7: Potential Pitfalls and Things to Consider
While an offset account offers great potential for saving on your mortgage, there are a few things to be aware of:
- Account Fees: Some banks charge fees for maintaining an offset account. Be sure to factor in these fees when calculating your potential savings. Many banks offer fee-free options if you meet certain conditions (such as maintaining a minimum balance or having your salary deposited into the account).
- Minimum Balance Requirements: Some lenders may impose minimum balance requirements to earn full offset benefits. Make sure your account terms align with your financial habits.
- Interest Rate Comparison: Not all mortgages offer offset accounts, and those that do may come with slightly higher interest rates. Compare your loan options carefully to ensure that the benefits of an offset account outweigh any additional costs.
How to Save Thousands Without Extra Repayments
In a Nutshell – Wrapping things up…
An offset account is one of the most powerful tools available to homeowners looking to save thousands on their mortgage—without the need to make extra repayments.
By reducing the interest charged on your home loan, an offset account allows you to pay down your mortgage faster and with fewer interest costs, all while keeping your money accessible.
Whether you maintain a modest balance or regularly contribute to your offset account, every dollar
