What Is Offset Account?
A transaction account linked to a home loan where the account balance offsets the loan principal, reducing the interest charged each day.
Definition
An offset account is a transaction or savings account linked to a home loan. The balance in the offset account is subtracted from the outstanding loan balance before interest is calculated each day. For example, a $500,000 loan with $50,000 in an offset account means interest is calculated on only $450,000. Funds in a 100% offset account are fully accessible at any time, unlike making extra repayments. Offset accounts are particularly effective for people who hold large cash balances, such as self-employed borrowers or those saving for other goals. Over the life of a loan, an offset account can save tens of thousands of dollars in interest and reduce the loan term significantly.
Formula
Example
A $600,000 loan at 6% p.a. with a $30,000 offset balance saves 6% x $30,000 = $1,800 interest per year, which reduces the loan term by approximately 18 months over 30 years.