If you have a variable rate home loan, it’s likely you’ll have the option of 100% offset. Here we discuss the advantages of offset, and how it can reduce the interest you pay (and help you pay your mortgage off faster). So how does it work? Read on!

Give me the main points

  • 100% offset uses savings in a designated account to ‘offset’ your home loan balance.
  • You pay interest on your home loan balance minus the amount in that account.
  • Even if your average balance is just a few hundred dollars, it’s worth it.
  • Keeping your average balance as high as possible saves you more.
  • Many people get their wages/salary paid into their offset account.

‘Pay your mortgage off faster’? Seems too good to be true

100% offset links an everyday savings account to your variable rate home loan, and uses the money in that account to offset your loan balance. The more money you have in the account, the less interest you pay on your home loan.

With a standard home loan, you’re paying interest on the total amount still owing on your home loan. But not with offset. Instead of being charged interest on the full home loan balance, you’re charged interest on your home loan balance minus the amount in your linked everyday account. In this way, the balance in your account 'offsets' the amount owing.

Consider this example. You’ve taken out a 25-year mortgage for $320,000. Now suppose you pay an average interest rate of 7.22%. We’re going to assume you have, on average, $10,000 sitting in your linked account (roughly what you’d hope to have as a ‘buffer’). Over the life of your loan, you’d save $46,319. Effectively, you end up paying off your loan sooner—your 25-year mortgage ends 20 months early.

Save interest every day

Usually your home loan interest is worked out each day, calculated on the balance of your loan (and then charged monthly). What does it mean for an offset customer? Every dollar you have in your linked bank account saves you interest every day that it’s there.

You don’t need to be rich. Even maintaining a balance of few hundred dollars can save thousands in interest.

Run the numbers through our home loan savings calculator—and now assume an average balance of just $500. On that $320,000 mortgage over 25 years (and at an average interest of 7.22%), you’d save $2521. Definitely worth it.

Calculate your potential interest savings

Our loan repayments calculator lets you customise a loan using several variables (loan amount, term, interest rate, etc.). You can also enter how much (on average) you’ll have in your 100% offset account. This’ll show you the savings you can make—and how much sooner you could pay off your loan.

Keep as much money in your offset as you can

Since every dollar in your linked everyday banking account saves you interest, it makes sense to keep your balance as high as possible. Why? Since your interest is calculated daily, you want to keep as much money in there, for as long as possible.

Here are two simple ways you can make offset work better for you.

Have your salary or wages paid into your offset

If your pay goes directly into your offset account, this money immediately reduces the interest you pay on your home loan. Even if it’s only in there for a couple of days, it adds up (note: you can still take your money out as usual). Download our Salary transfer form (PDF, 208KB) to move over your pay easily.

Use your credit card for everyday purchases

To do this you need to be a disciplined spender and know how much your monthly expenses are. You keep enough money for your expenses (groceries, utility bills, etc.) in your account and instead use your credit card for these. This lets you to keep the maximum amount in your account, offsetting interest.

Then, at the end of the month, you transfer the money you have set aside in your account and pay off your credit card balance in full (so all your expenses are paid off and you don’t accrue any credit card interest).

The crucial element of this strategy is this: you must set aside the money for your expenses in your account so you’re able to pay off all those expenses you’ve put onto your credit card at the end of the month. If you’re not able to do this, you’ll end up paying interest on your credit card.

If you’re not disciplined with your credit card, this may not be the best option for you.

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