Smart Ways to Approach an Offset Account as a First Home Buyer

An offset account can reduce the interest you pay on your home loan, but only if you keep real savings in it and can accept the trade-offs. For a Traralgon first home buyer, the question is whether the account will earn its place in your loan.

At TM Finance Group, we like to walk first home buyers through this choice early, before a loan is picked. It is a lot easier to choose a feature on purpose than to find out later what you are paying for.

What Is an Offset Account and How Does It Work?

An offset account is a transaction account linked to your home loan. The balance in it is subtracted from your loan balance when interest is calculated, so you pay interest only on the difference.

If your loan is $500,000 and you hold $20,000 in the offset account, interest is charged as though you owe $480,000. Your savings stay available to spend, and you do not receive taxable interest on that money, which is a point to confirm with your accountant. Offset accounts are normally linked to a variable rate loan, and some lenders offer them with fixed loans only in part or not at all. Ask each lender how it works.

Offset Account vs Redraw: Which Suits a First Home Buyer?

An offset account keeps your savings in a separate account you can access like any other. Redraw lets you pull back extra repayments you have made into the loan itself. Both can reduce interest, but access and conditions can differ by lender.

With redraw, your extra repayments sit inside the loan, and some lenders limit or charge for withdrawals. With an offset, your money is separate, which can suit buyers who want a clear line between savings and debt. If you plan to renovate or have irregular income, easy access to your own cash matters. Our home loans page covers the main loan structures if you want to compare them side by side.

What Does an Offset Account Cost?

Loans with an offset account often carry a higher interest rate or an annual package fee than similar loans without one. That cost is the main trade-off, and it can outweigh the interest you save if your offset balance stays small.

A useful test is to compare the extra cost with the interest you would offset. The rate difference or fee applies to the whole loan, while the benefit only applies to the balance you keep in the account. This is why the question is less about whether offsets are good and more about whether you will hold enough savings in one.

How Much Could an Offset Account Save? A Worked Example

An offset account saves interest in proportion to the balance you hold. At an illustrative rate of 6.75% p.a., every $10,000 sitting in the offset avoids about $675 of interest over a year, before any extra fee or rate premium.

Consider a first home buyer in Traralgon who borrows $500,000 on a variable loan at that illustrative 6.75% p.a. and keeps an average of $15,000 in the offset account. The situation: the lender charges a $395 annual package fee for the loan with the offset. The solution: the buyer checks the maths before choosing. The $15,000 balance avoids roughly $1,012 of interest a year ($15,000 x 6.75%), so after the fee the benefit is about $617.

The outcome: the offset still comes out ahead, but only by a modest margin. If the average balance had been $5,000, the avoided interest would be about $337, which is less than the fee. In that case a loan without the offset, or a loan with redraw, would suit better. This is an illustration only, and your own figures will depend on your lender, your balance and your loan. Our borrowing capacity page can help you check what you may be able to borrow before you run your own comparison.

Does an Offset Account Work With First Home Buyer Schemes?

An offset account is a loan feature, so it depends on the lender and the loan product, not on the scheme itself. Housing Australia's published materials for the 5% Deposit Scheme do not state which loan features are available, and the loan comes from the participating lender.

That means you should ask the lender directly whether an offset is available on the loan you are being offered under any scheme. State grants and stamp duty concessions are separate again, and the Australian Government says Help to Buy participants can still receive first home owner grants and stamp duty concessions. For a wider look at what may apply to you, see our first home buyers page.

When Is an Offset Account Not Worth It?

An offset account is usually not worth it if you will hold only a small balance, or if the extra rate or fee is higher than the interest it saves. Buyers who spend most of what they earn, or who have just used their savings on a deposit and settlement costs, may find the account sits nearly empty.

In the early years of owning a first home, many buyers are rebuilding their savings. If that is you, a basic variable loan with redraw, or a lower cost loan, can leave more money in your pocket. You can always review the structure later. A loan health check is a good way to see whether your loan still suits you once your savings have grown.

Questions to Ask Before You Choose

Before choosing, ask your broker how much the offset account costs, whether it is attached to a variable or fixed loan, and whether the lender limits the number of offset accounts or charges for transactions. Also ask what happens to the feature if you refinance later.

Setting your pre-approval around a loan you can comfortably afford matters more than any single feature. We can compare lenders on your behalf and show you the numbers for your situation, so you can see exactly what the offset would cost and what it could save.

Call one of our team or book an appointment at a time that works for you. Our Traralgon team will talk through your loan options, run the numbers on an offset account, and help you choose a structure that fits your plans.

Frequently Asked Questions