How offset accounts are helping Aussies hack their home loans

Australians with a mortgage appear to be increasingly turning towards offset accounts not only to save money on their loans, but to better manage their finances.

Last month, Westpac revealed that it had recorded a 37% uptick in the number of offset accounts opened by mortgage customers in the past five years and a 63% increase in offset balances.

Similarly, research released by fellow major bank NAB noted that, since the pandemic, 70% of its new mortgage customers have elected to offset their loans.

Damien MacRae, managing director of mortgages at Westpac, says that for many borrowers, a major motivation has been to find ways to reduce their loan costs.

"With interest rates top of mind for Australians, we know many customers are thinking about how to get ahead on their home loan.

"An offset account is an everyday bank account linked to your home loan, where every dollar in your account reduces, or offsets, the interest you pay."

Why borrowers are embracing multiple offsets

At the same time as interest in offset accounts has increased, more lenders have started giving borrowers the option of utilising multiple offset accounts.

Both NAB and Westpac recently announced moves to roll out up to ten offset accounts to customers with eligible home loans, joining the likes of the Commonwealth Bank, Macquarie Bank, Bendigo Bank and other lenders which already offer multiple offsets.

"Multiple offset accounts give you the flexibility to 'bucket' finances for different purposes," MacRae explains.

"This can offer benefits such as more visibility and control over how you allocate your money, manage your cash flow and track spending."

Alya Manji, mortgage broker and franchisee and at Aussie Hurstville, has seen the enthusiasm for multiple offsets first-hand among her clients.

"Honestly, people seem to love them. Multiple offsets are really attractive to mortgage owners at the moment - they seem to be a real selling point."

Manji says that this enthusiasm often comes from families or couples who want to be able to separate their finances within the offset ecosystem, while still enjoying the benefits of offsetting.

"A lot of families don't want to just put everything into one offset. They like being able to have a separate account for each of their kids, one for their own savings and one for their normal everyday spending.

"So they love the fact that they can have, say, five separate offsets that are offsetting that one home loan account."

The benefits of an offset account

Stepping back for a second, what are the possible cost and time saving benefits that can come from using a mortgage offset account, or multiple offsets?

Take an example of a homeowner with a $700,000 loan which is being paid off over 30 years and currently has a variable rate of 6.00% p.a. They also have $50,000 in additional savings which they plan to store in an offset account.

If they were to keep that $50,000 in an offset over the life of the loan it could save them $207,965 in interest and shave four years off their loan term. That's assuming that their interest rate remains steady though, which is unlikely.

Going even further, if they were able to contribute $200 a month on top of that $50,000 balance they would save a total of $276,724 in interest and reduce their loan term by five years and five months.

While the potential benefits will depend on each individual situation, Manji says that an offset account can often prove a more effective option for a borrowers' savings than a term deposit or savings account.

"One of the most common discussions I have with new clients to the market is helping them understand the comparative benefits of offsetting.

"Yes, a term deposit offering a 4% p.a. may sound great, especially if you're wanting to split your savings up. But once you get a home loan, the best return you're going to get is probably to use your savings to offset that loan, provided that the loan rate is higher than the term deposit, that is."

Manji also notes that interest earned through a term deposit or savings account will be subject to income tax, whereas money kept in an offset account doesn't generate income, so won't be taxed.

Lenders do tend to charge fees on offset accounts though - often as part of package deals. So borrowers may want to weigh that up against any money they're able to save by offsetting.

The difference between offset and redraw

One of the other common questions Manji gets from clients is on the difference between offset accounts and redraw facilities. After all, they are similar in some ways.

To recap, offset accounts are separate accounts linked to a home loan which act just like normal bank accounts when it comes to making transfers or transactions via an attached debit card. However, the money kept inside them will also reduce the total home loan balance that interest is applied to.

A redraw facility, meanwhile, is a home loan feature - it's not a separate account with a card. It can be used to withdraw additional payments which have been made towards the loan, beyond the minimum.

Like an offset account, building redraw can help borrowers reduce the interest they will need to pay on their loan and the time it will take them to pay it off, but as Manji explains, that can require a bit of extra legwork.

"Say someone's pay goes into their everyday account each fortnight. They would then have to transfer that into their home loan account for it to start reducing their interest.

"Then if they wanted to redraw some of that money to buy a coffee, they would have to go online again and transfer it back to their everyday account to access those funds via a card.

"So in that sense, people will need to be really diligent about where their money is and know that any money in their everyday account is doing nothing for them - it isn't reducing interest on their loan."

There can also be different tax implications for people with investment loans. For example, investors may be able to claim a deduction on funds withdrawn from a redraw facility if they're used for investment purposes, but not for personal uses.

For offsets, the interest on the loan balance minus the amount held in offset may be tax deductible, meaning that how offset funds are spent may be less relevant.

There may also be advantages to using an offset account over a redraw facility for homeowners who plan to convert their owner-occupied property to an investment, or to use equity in their existing property to fund an investment down the track.

But given that each individual's situation will be different, it can be worth seeking advice from an accountant or expert first.

For more tips on getting the most out of your office account, check out our article on how to make your offset account work for you.

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