An offset account is an account linked to your home loan that operates like a transaction or saving account. This type of account allows you to reduce the amount of your home loan you are required to pay interest on. This can be very beneficial however they do usually come with a higher interest rate and various other fees.
For example, if you bought a $1.2 million house at a 5% interest rate and a 200k deposit.
No offset account: You owe the bank $1 million, and therefore you pay 5% interest on that 1 million. 5% of 1 million is $50 000.
Offset account: You owe the bank $1 million, however you have $100 000 in an offset account. This means you would only pay the 5% interest on $900 000. Therefore, you would pay $45 000 interest.
Although this may seem like a small amount, over a 30-year home loan, you can save a significant amount of money. It can also be beneficial as you can still take money in and out of the account, this allows for greater flexibility with an offset account compared to a regular mortgage.
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