An offset account works best for money you need within a few months, not all your savings
An offset account is a savings account linked to your mortgage. Money sitting in it reduces the amount of interest you pay on your home loan — but it does not earn you any interest itself. That trade-off makes sense for some money and not for others. Putting every spare dollar into an offset account means missing out on interest earnings that could grow your wealth faster, especially if you have a long time before you need the money.
The real question is not whether to use an offset account, but which money belongs there and which belongs somewhere else. Your answer depends on three things: how soon you need the money, how much interest you could earn elsewhere, and how comfortable you are with risk.
Key Takeaways
- An offset account saves you money on mortgage interest but does not earn you interest, so it works best for money you will spend within months, not years.
- Money you will not need for five or more years usually grows faster in a high-interest savings account or investment account than it saves in an offset account.
- The offset account is most useful for your emergency fund and money set aside for near-term goals like a car or holiday.
- You can split your savings between an offset account and other accounts — there is no rule that says you must choose one or the other.
- Your mortgage interest rate and the interest rates available on savings accounts both change, so what makes sense today may not make sense next year.
How an offset account actually saves you money
Your mortgage lender calculates interest on your loan balance each day. If you owe $400,000 and have $50,000 in an offset account, the lender charges interest only on $350,000. That is the offset — your savings balance reduces the amount they charge you interest on.
The benefit depends entirely on your mortgage interest rate. If you are paying 6% interest on your mortgage, every $10,000 in an offset account saves you $600 per year. If your rate is 3%, the same $10,000 saves you only $300 per year. The higher your mortgage rate, the more valuable the offset account becomes.
This is different from a regular savings account, which pays you interest on the money you deposit. An offset account pays you nothing — it just reduces what you owe.
When an offset account makes the most sense
An offset account is the right place for money you will need soon. If you are saving for a car you plan to buy in six months, or building an emergency fund you might need next month, an offset account does the job. The money stays accessible, and you benefit from the offset effect the whole time it sits there.
An offset account is also useful if you have irregular income — say you are self-employed or work on contract. Money comes in unevenly, and you need a buffer to cover months when work is slow. An offset account lets you keep that buffer working for you by reducing your mortgage interest while you wait to spend it.
The same logic applies to money you are saving for a known expense within the next year or two: a holiday, home repairs, a wedding, or a car replacement. These goals have timelines, and the offset account keeps the money safe and accessible while it reduces your mortgage cost.
When other accounts grow your money faster
If you will not need the money for five years or longer, a high-interest savings account or investment account usually beats an offset account. Here is why: a high-interest savings account might pay 4% or 5% per year (rates change, so check current offers). That money grows. An offset account pays 0% but saves you interest on your mortgage.
The comparison depends on your mortgage rate. If your mortgage costs 6% and a savings account pays 4%, the offset account wins — you save 6% instead of earning 4%. But if your mortgage costs 3% and a savings account pays 5%, the savings account wins — you earn 5% instead of saving 3%.
For money you will not touch for ten or twenty years, investment accounts (like managed funds or index funds) have historically grown faster than either savings accounts or offset accounts, though they carry more risk. A financial adviser can help you understand whether that risk suits your situation.
You do not have to choose one account or the other
Many people split their savings. They keep three to six months of expenses in an offset account — their emergency fund — and put longer-term savings elsewhere. This approach gives you the best of both: your emergency money is accessible and reducing your mortgage interest, while your long-term savings grow in a place designed for growth.
You might also split based on what the money is for. Money for a holiday next year goes in the offset account. Money for retirement in thirty years goes in an investment account. Money for a car in three years might go in a high-interest savings account.
Some people keep a smaller offset account (just enough for emergencies) and put everything else in a separate savings account or investment account. Others do the opposite — they maximize their offset account and keep only a small emergency fund elsewhere. Neither approach is wrong; it depends on your goals and how comfortable you are with different types of accounts.
How to decide what amount to keep in your offset account
Start by calculating your monthly expenses — rent or mortgage, food, utilities, insurance, transport, and everything else you spend regularly. Most financial advisers suggest keeping three to six months of expenses in an emergency fund. That is a good starting point for your offset account.
Next, add any money you know you will need within the next year. If you are saving for a holiday, a car service, or home repairs, add those amounts. That total is your "offset account target" — the amount that makes sense to keep there.
Anything beyond that target is money you will not need soon. That money usually grows faster in a high-interest savings account or investment account. Move it there and let it work for you over time.
Review this split once a year. Your mortgage rate might drop, making the offset account less valuable. Interest rates on savings accounts might rise, making them more attractive. Your life circumstances change too — a new job, a child, a health issue — and your savings goals shift with them.
The numbers change when interest rates move
Mortgage rates and savings account rates are not fixed. They move up and down based on what the Reserve Bank does and what banks decide to offer. This means the best place for your money can change.
When mortgage rates are high (say 7% or 8%), an offset account becomes very valuable — every dollar there saves you a lot of interest. When mortgage rates drop to 2% or 3%, the offset account becomes less powerful, and a savings account paying 4% or 5% might be better.
You do not need to move money around constantly, but it is worth checking once a year whether your split still makes sense. If rates have shifted significantly, you might want to adjust.
Frequently Asked Questions
What if I have a really high mortgage rate?
The higher your mortgage rate, the more valuable your offset account becomes. If you are paying 8% interest, every $10,000 in an offset account saves you $800 per year. In that case, keeping a larger offset account balance makes more sense than moving money to a savings account earning 4% or 5%.
Can I access money in an offset account whenever I need it?
Yes. An offset account is a regular savings account linked to your mortgage. You can withdraw money anytime without penalty. The offset benefit stops the moment you withdraw — the money no longer reduces your mortgage balance — but there are no fees or waiting periods.
Should I pay off my mortgage faster instead of using an offset account?
That depends on your situation and comfort with debt. Paying extra into your mortgage reduces the loan faster and saves interest. An offset account gives you the same interest saving but keeps the money accessible if you need it. Many people do both: they put emergency money in an offset account and put extra income toward the mortgage once their emergency fund is full.
What if interest rates on savings accounts are higher than my mortgage rate?
If a savings account pays 6% and your mortgage costs 4%, you earn more by putting money in the savings account. However, consider tax: interest on savings accounts is taxable income, while the interest you save on a mortgage is not. A financial adviser can help you compare the after-tax benefit of each option.
Do I need to tell my bank I am using an offset account?
No. Once your offset account is set up and linked to your mortgage, it works automatically. The bank calculates your mortgage interest on the reduced balance every day. You do not need to do anything except keep money in the account.