If you’ve got a mortgage and you’re not using an offset account, it might be time for a little financial enlightenment. Many Australians don’t fully understand how powerful an offset account can be when paired with their home loan, and banks aren’t always rushing to set the record straight.
What is an Offset Account?
Think of an offset account like a regular everyday transaction account that’s cleverly tied to your mortgage. You can use it for your everyday banking, shopping, bills, and maybe the odd cheeky Friday lunch, but behind the scenes, it’s quietly working financial magic.
Myth-Busting: The $20,000 Rule
Walk into a bank, and they might tell you you need $20,000 or more in your offset account for it to be worth it. Not true.
Even a smaller balance in your offset account can reduce the interest you pay on your mortgage. Why? Because every dollar in that account offsets your loan principal, and that’s where the savings start.
Earn vs. Save: What the Tax Office Sees
Here’s a fun fact most people miss: if you put your money in a savings or deposit account, any interest you earn is considered income. And yes, the tax office takes a slice.
But when you park that same money in an offset account, you’re not earning interest; you’re saving it. And here’s the kicker: saved interest isn’t taxable. It’s money that stays in your pocket, untouched by the ATO.
How It Works
Let’s say you have a $100,000 mortgage and $10,000 in your offset account. The bank calculates interest as if your loan is only $90,000. That means your interest bill drops, and you start to chip away at the loan faster than if you were just making the minimum repayments.
Over time, that can add up to serious savings, and potentially years shaved off your loan.
Why It’s Especially Powerful for Owner-Occupied Loans
Offset accounts shine brightest when paired with your home, your owner-occupied mortgage. Not only are you living in your asset, but you’re also leveraging your cash flow to reduce interest, not just line a bank’s bottom line.
The more you funnel into your offset, the less interest you pay, and the quicker you can move towards financial freedom.
The Bottom Line
Whether it’s $500 or $50,000, your offset account is a quiet achiever. It doesn’t earn interest,it earns you freedom. Freedom from interest. Freedom from extra years stuck in repayments. And freedom from unnecessary tax on your hard-earned money.
I’m Leanne Watson, your Finance Angel, here to help you make your money work smarter, not harder.