How an offset works

An offset is an everyday transaction account linked to your home loan. Whatever sits in it is subtracted from your loan balance before the bank works out your interest. Owe $600,000 with $20,000 in the offset, and you are charged interest on $580,000.

Your repayment stays the same, so the interest you save goes into paying down the loan instead. That is why the balance falls faster and the loan finishes sooner. The money is still yours to use whenever you need it.

It also beats a savings account for most people. Savings interest is taxed. Interest you avoid paying on your home loan is not.

When an offset is not worth it

Offsets usually come with a package fee, often a few hundred dollars a year, or a slightly higher rate than a basic loan. If you only ever keep a small balance in it, the fee can cost more than the offset saves.

Some lenders offer a partial offset that only counts a portion of your balance, and some only allow one offset account. And it only works if the money stays there. Spend it and the saving goes with it.

How this is calculated

• Your repayment is principal and interest over the years remaining at the rate you enter, and it stays the same for the whole loan.
• Each month the offset balance is taken off the loan balance and interest is charged on the difference. The interest saved goes into paying down the loan, which shortens the term.
• Interest is calculated monthly. Most lenders calculate daily and charge monthly, which usually works out slightly better, so treat these figures as the conservative case.
• Deposits are added at the start of each month and assumed to stay in the account.
• The rate is assumed to stay the same for the whole term. Fees and package costs are not included.