Fran Jerome is a CPA-qualified mortgage broker and strategist at Oliey Finance in SE Melbourne. This guide explains how offset accounts work, why they save you money, and how to use one properly so it actually makes a difference to your loan.
An offset account is one of the most useful tools available to Australian homeowners. It is also one of the most misunderstood. Many borrowers have one sitting on their home loan and are not using it in a way that delivers any real benefit.
What Is an Offset Account?
An offset account is a transaction account linked directly to your home loan. The balance sitting in that account reduces the loan amount that interest is calculated on, every single day.
Here is a simple example.
You owe $500,000 on your home loan. You have $30,000 sitting in your offset account. The lender calculates your daily interest on $470,000, not $500,000. That $30,000 is working for you every day it sits there, at your full mortgage interest rate, completely tax free.
You can still use the money. You can still spend from it, transfer it, and use it as your everyday account. But while it is in there, it is reducing what you pay in interest.
Why an Offset Account Beats a Savings Account
Most savings accounts in Australia earn 4% to 5% interest, and that interest is taxable as income.
Your offset account earns the equivalent of your mortgage interest rate, which is typically 6% or higher, and it is not taxable because you are not earning interest, you are avoiding it.
For someone on a 37% marginal tax rate, a 6% offset benefit is worth significantly more than a 6% savings account rate after tax. The offset wins on both the rate and the tax treatment.
How an Offset Account Reduces Your Loan Term
The interest saving compounds over time. Less interest charged each month means more of your scheduled repayment hits the principal. That reduces your balance faster than the lender’s standard schedule.
This is the foundation of the Buffer Flip Strategy developed by Fran Jerome at Oliey Finance. By directing your salary into the offset and keeping a consistent buffer there, you can shift from paying mostly interest to paying mostly principal years ahead of the standard loan schedule.
On a $600,000 loan at 6%, maintaining an average balance of $30,000 in your offset over the life of the loan could save over $80,000 in interest and cut several years off your loan term. The more you keep in there, and the more consistently you do it, the greater the benefit.
The Right Way to Use an Offset Account
Most people open an offset account and use it as a spare savings account. They park some money in there and leave it. That works to a degree, but it is not the most effective approach.
The most effective approach is to treat your offset as your primary transaction account.
Your salary goes in. Your bills, groceries, fuel and expenses come out via a debit card or direct debits. The money sits in the offset for the full period between when you earn it and when you spend it, reducing your interest every day in between.
Over a full year, the average daily balance in your offset ends up significantly higher than if you just parked a static amount in there. That difference translates directly into interest savings.
Offset Account vs Redraw Facility
These two features are often confused. They are not the same thing.
An offset account sits alongside your loan as a separate account. Your money is accessible any time, without applying to the lender. You can transfer it out the same day if you need to.
A redraw facility holds extra repayments you have made into the loan itself. To access that money, you typically need to apply to the lender. Some lenders process redraws quickly. Others are slow. Some lenders have been known to restrict redraw access during periods of financial stress.
For flexibility and certainty of access, an offset account is the better structure. For the Buffer Flip Strategy to work properly, an offset account is required.
What Type of Loan Do You Need for an Offset Account?
A 100% offset account is typically available on variable rate home loans. Most standard variable products from major and non-major lenders offer this feature.
Fixed rate loans usually do not allow offset accounts, or limit the benefit to a capped amount. If your loan is fixed and you want to take advantage of an offset account, you may need to wait until your fixed term expires or assess whether breaking early makes financial sense.
If you are unsure whether your current loan has a proper 100% offset account, check your loan documents or ask your broker. A partial offset or a capped offset does not deliver the same benefit.
Frequently Asked Questions
Q: What is an offset account?
A: An offset account is a transaction account linked to your home loan. The balance in the account reduces the loan amount that interest is calculated on, every day. If you owe $500,000 and have $20,000 in your offset, you pay interest on $480,000 instead of $500,000. You can still access and spend the money freely.
Q: Is an offset account worth it?
A: For most borrowers with a consistent income and some savings, yes. The interest saved over the life of a loan typically outweighs any account fees by a significant margin. The key is using it properly. An offset account with a low balance that you never add to delivers very little benefit. Used correctly as your primary transaction account, it can save tens of thousands of dollars.
Q: What is the difference between an offset account and a redraw facility?
A: An offset account sits beside your loan as a separate account. You can access your money any time without asking the lender. A redraw facility holds extra repayments inside the loan itself, and accessing those funds requires an application. Offset accounts give you more flexibility and certainty of access. For borrowers using the Buffer Flip Strategy or managing investment properties, the offset structure is almost always the better option.
Q: Does money in my offset account earn interest?
A: No. You do not earn interest on offset account balances. Instead, the balance reduces the interest charged on your loan. The effect is the same as earning your mortgage interest rate on those funds, but the benefit is tax free because you are avoiding interest rather than earning it. For most borrowers, this makes the offset more valuable than a standard savings account on both rate and tax grounds.
Q: Can I have multiple offset accounts linked to one loan?
A: Some lenders allow multiple offset accounts linked to a single loan. This can be useful for budgeting, for example keeping a bill-paying account separate from your everyday spending account, while both offset against the loan. Not all lenders offer this feature. If multiple offsets are important to you, tell Fran before your loan is selected so it can be factored into lender choice.
Q: Does an offset account work on a fixed rate loan?
A: Generally not in the same way. Most fixed rate products either do not allow an offset account or limit it to a capped amount such as $10,000. If you are on a fixed rate and want the full benefit of an offset, you will typically need to wait until your fixed term expires or assess whether moving to a variable rate makes sense. Fran can help you weigh up that decision.
Q: What is the best way to maximise my offset account?
A: Direct your salary into the offset account and use it as your everyday transaction account. The longer your money sits in the offset before you spend it, the more interest you save. Avoid keeping a separate savings account alongside an offset account at a lower rate. Stack everything in the offset and let it work. This is the foundation of the Buffer Flip Strategy.
Q: How do I know if my current loan has a proper 100% offset account?
A: Check your loan documents or call your lender and ask specifically whether your offset is 100% and unlimited. Some loans advertise an offset feature but cap it at a certain dollar amount or only apply a partial offset percentage. These are not as valuable. If your current loan does not have a proper 100% offset, it may be worth reviewing whether refinancing makes sense.
Q: Can Fran help me restructure my current loan to include an offset account?
A: Yes. Fran reviews existing loan structures as part of a strategy call. If your current loan does not have an offset account, or if the loan structure is not set up to take full advantage of one, Fran can assess whether refinancing into a better structure is worth the cost and effort given your situation.
Book a Free 30-Minute Strategy Call with Fran
Or call directly: 0409 961 703 Email: fran@olieyfinance.com.au
Fran Jerome | Credit Representative 442427 | Authorised under Finsure Finance & Insurance Pty Ltd | ACL 384704 | MFAA Member
General advice only. Interest savings figures used in this page are illustrative examples only. Actual savings depend on individual loan balance, interest rate, income, spending patterns, and consistency of strategy application. Always consider your personal financial situation before making changes to your home loan structure.