In the last article we looked at redraw facilities and the trap home owners find themselves in when they turn their home into an investment in the future.

The offset provides a direct solution to the redraw problem.

Redraw sounds simple but has some hidden complexities. The offset on the other hand sounds more complex but is one of the simplest tools available to you as a home owner.  

What is an offset account?

An offset account is an everyday transaction account linked to your home loan. It has a card, a BSB and account number, and you use it exactly like a normal bank account.

The magic is in how your lender calculates interest. Instead of charging interest on your full loan balance, the lender charges interest on your loan balance minus the balance of your offset account.

Say you have a $500,000 home loan and $50,000 sitting in your offset account. You’re only charged interest on $450,000. Because home loan interest is calculated daily, every dollar in that account is working against your mortgage every single day it sits there!

The difference compared to redraw is that your offset money never pays down the loan. It is fully accessible and doesn’t muddy the original purpose of the loan. Which means less tax messiness in the future.

What the savings can look like

Take that $500,000 loan at 6% interest over 30 years.

With no offset balance, you’re charged interest on the full $500,000, about $30,000 in year one.

Keep an average of $50,000 in your offset and you’re charged interest on $450,000 instead, about $27,000. That’s roughly $3,000 saved in a single year, and because your repayments stay the same, the savings go straight into paying down your principal faster. Maintained over the life of the loan, an offset balance like that can shave years off your mortgage and save an incredible amount of money.

Two things make this even better than it first appears.

First, the return is tax-free. If you put $50,000 in a savings account earning 5%, the interest you earn is taxable income! after tax, a borrower on a 30% marginal rate keeps closer to 4%.

Money in an offset “earns” the full home loan rate by saving you interest, and interest you never pay isn’t income the ATO can tax. For most borrowers, an offset beats any savings account or term deposit they could find with zero risk.

Second, it works on money in transit. Have your salary paid directly into your offset. Even money that only sits there for a fortnight before covering your living costs reduces your daily interest while it waits. Your emergency fund, your holiday savings, your tax set-aside if you’re self-employed, all of it can live in offset, staying completely accessible.

Many lenders now allow multiple offset accounts against a single loan, so you can keep your buckets (bills, savings, emergency fund) separate and still have every account offsetting the loan.

How using offsets compares to redraw

If there’s any chance your current home becomes a rental one day then it is worth considering an offset.

Putting money into your redraw facility (as opposed to offsets), means your extra repayments are permanently reducing your loan, and redrawing them counts as new borrowing. Pay a $500,000 home loan down to $450,000, then convert the property to an investment, and your deductible debt is $450,000 forever. The $50,000 of diligent extra repayments has permanently shrunk your future tax deductions if this home turns into an investment.

Now run the same scenario with an offset.

You have a $500,000 loan and, instead of paying extra into it, you’ve built up $50,000 in your offset account. Along the way you’ve saved exactly the same interest as the redraw saver, interest was charged on $450,000 in both cases.

Then you upgrade. You take your $50,000 out of the offset and put it toward your new family home. Because that money was always yours (sitting in your own bank account, never part of the loan) withdrawing it isn’t borrowing. It’s just, your money sitting in an account.

Your old loan still stands at $500,000, all of it originally borrowed to buy what is now your rental property. The full $500,000 remains deductible debt. At 6%, that’s the difference between deducting $30,000 of interest a year and deducting $27,000 the offset borrower is $3,000 a year ahead in deductions, every year, purely because of how the same savings were structured.

What to check before you sign up

Offsets are excellent, but they’re not free, and not all offsets are equal. Three things to look at:

The cost. Offset accounts usually come with an annual package fee commonly a few hundred dollars a year or a slightly higher interest rate than a bare-bones loan.

You generally need around $6000-$7000 working hard for you in your offset account to make it cover the fees.

100% or partial. A 100% offset counts every dollar in the account against your loan. A partial offset only counts a portion. Insist on 100% it’s the standard for quality variable loans, and the difference compounds meaningfully over 30 years.

Fixed-rate limitations. Offsets generally only work with variable rate loans. Most lenders don’t allow a full offset against a fixed rate. If you want the certainty of fixing, a common structure is to split the loan.

You can fix a portion, and keep a variable portion with the offset attached, and size the variable portion to fit your offset balance. This is exactly the kind of structuring conversation a broker should be having with you before you lock anything in.

Who should be using an offset?

An offset account earns its keep for almost anyone with a variable rate loan and a healthy cash flow with a few thousand to keep in there. But it is very important to upgraders or the self employed folk.

Future upgraders

If your current home might ever become an investment property, build your savings in offset, not in the loan. You preserve every dollar of future deductible debt while saving identical interest today. This is the single most valuable structuring decision you can do.

Savers

Emergency funds, house deposits for the next purchase, renovation money any meaningful pool of cash beats its savings-account return by sitting in offset instead, tax-free and instantly accessible.

Self-employed

If you set money aside for tax, GST or quiet months, offset lets those reserves cut your mortgage interest every day until you need them.

Book a call with Kingdom Mortgage Broking and we’ll review how your loan is structured, whether an offset genuinely stacks up for you, and how to set things up now so your future options, including keeping your home as an investment one day.

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This article is general information only and doesn’t take your personal circumstances into account. It isn’t tax advice the tax consequences of redraw, loan purpose and property conversion depend on your situation, so speak with a registered tax agent or accountant before acting.  (CRN 572093) of Kingdom Mortgage Broking (ABN 63 689 434 017).