5 ways your offset account could be costing you money

Offset accounts are one of the most popular features available on an Australian home loan. By holding your savings in an account linked to your mortgage, you can directly reduce the balance on which interest is calculated, potentially saving thousands of dollars over the life of your loan.

However, simply having an offset account does not mean you are automatically maximising its benefits.

Here are a few common offset account mistakes to look out for, along with practical steps on how to avoid them.

If you have an offset account but most of your savings are sitting in a separate savings account, you could be missing out.

A standard savings account earns interest on the money you deposit. An offset account works differently. Instead of paying you interest, it reduces the balance your lender uses to calculate interest on your home loan.

For example, if you owe $600,000 on your mortgage and keep $50,000 in a 100% offset account, your lender generally charges interest on $550,000, not the full loan balance. The more money you keep in your offset account, the more interest you could save over time.

For many borrowers, an offset account can be more rewarding than a standard savings account because:

• Home loan interest rates are often higher than savings account rates, meaning the interest you avoid paying may be greater than the interest you could earn.
• Interest earned on a savings account is generally taxable, while interest saved through an offset account isn't income, so there is no tax to pay on those savings.
• Your money remains accessible, allowing you to use it for emergencies or everyday expenses while still reducing your home loan interest.

An offset account isn't always the best option. A standard savings account may be worth considering if:

• Your home loan has a low fixed interest rate and your savings account offers a higher after-tax return;
• Your lender charges annual package fees or a higher interest rate for an offset account, and your offset balance is too small to outweigh those costs; or
• You're managing an investment property, where the tax implications of using an offset account or redraw facility may differ. In these situations, it's worth seeking professional tax advice.

Quick tip: If your lender calculates interest daily (as most do), having your salary paid into your offset account means your money starts reducing your home loan balance as soon as it's deposited. Even leaving your income there for a few extra days before paying bills may help reduce the interest you pay over time.

Many borrowers set up an offset account when they take out their home loan and rarely think about it again. After all, if your mortgage repayments are being deducted each month, it's easy to assume everything is working as it should.

However, ASIC's recent review found this isn't always the case. The regulator identified cases where offset accounts were never linked, linked later than promised or became disconnected after changes were made to a home loan. In many cases, borrowers continued making the same repayments and had no obvious indication that their offset account wasn't reducing the interest charged on their loan.

Rather than assuming your offset account is working, it's worth checking from time to time, particularly if you've refinanced, switched loan products, come off a fixed-rate loan or requested changes to your mortgage.

Quick check: Not sure whether your offset account is working as it should? Use the Bheja AI Offset Tracker to check whether your offset appears to be correctly linked and estimate how much interest it could be saving you.

An offset account can help reduce the interest you pay on your home loan, but it usually comes with a cost. Some lenders charge an annual package fee, while others may charge a higher interest rate for loans with an offset feature.

Before choosing an offset home loan, work out whether the potential interest savings are likely to outweigh these costs. Consider how much you can realistically keep in the offset account, your home loan interest rate and any annual or ongoing fees.

For example, if you expect to keep only a small balance in your offset, the interest savings may not be enough to justify paying extra for the feature. But if you can maintain a substantial balance, the savings can offset the additional cost.

Quick tip: Don't just compare the interest rate. Compare the total cost of the loan against the interest savings your offset could generate.

An offset account and a redraw facility can both help reduce the interest you pay on your home loan, but they work differently.

Money in an offset account remains your money. You can generally use it like a transaction account, including making payments, receiving your salary and accessing your savings when you need them.

Money in a redraw facility has already been paid into your home loan. It reduces your outstanding loan balance, which can reduce the interest you pay. You may be able to access those extra repayments later, but the money is technically part of your home loan rather than sitting in a separate transaction account.

Access to redraw can also depend on your lender and loan terms. Some lenders may impose minimum withdrawal amounts, charge a fee or place restrictions on how and when you can redraw.

Quick tip: If you want your savings to remain readily accessible while still reducing your home loan interest, an offset account may offer greater flexibility. If you're comfortable paying extra directly into your loan and don't need regular access to the money, redraw may be suitable. The right option depends on your loan terms and circumstances.

Your offset account could be working exactly as it should, but that doesn't necessarily mean you're getting the best deal on your home loan.

Your interest rate, loan fees and features can all affect how much your mortgage costs. It's also worth considering whether your circumstances have changed since you took out the loan. You may have built up more equity, reduced your loan-to-value ratio (LVR) or become eligible for a different range of products.

When reviewing your mortgage, look beyond the interest rate. Check whether you're paying for features you use, whether your lender is offering competitive pricing, whether you could qualify for cashback or other incentives, and whether refinancing could leave you better off after accounting for switching costs.

You don't necessarily need to refinance every time you find a lower rate. But you should know what you're paying and what alternatives are available.

Quick tip: Give your mortgage a health check at least once a year, and whenever something significant changes, such as your income or property value. The aim isn't always to switch loans. It's to make sure you have a mortgage that still suits your circumstances.

An offset account can offer value for borrowers who want to keep savings accessible while reducing home loan interest. The account functions as an everyday transaction account, allowing you to deposit salaries directly and cover regular living expenses or bills.

However, an offset account is not essential for every home buyer or refinancing applicant. Borrowers who maintain minimal savings balances, prefer simpler banking, or want to avoid ongoing package fees may find a basic home loan to be a more cost-effective option.

Ultimately, the key question is not just whether a home loan includes an offset feature, but whether you will use the account actively enough to deliver a genuine financial benefit.

If you already hold an offset account, the next step is confirming whether it is working effectively and verifying that the lender has correctly linked the account to the mortgage.