An offset account is simply a transaction account linked to your home loan. The balance in this account "offsets" the loan principal when interest is calculated.
How It Works
You have a $500,000 mortgage at 6%.
You have $20,000 in your offset account.
The bank calculates interest on $480,000 ($500k - $20k).
This saves you $1,200/year in interest. Because that interest is calculated daily, the savings compound massively over the life of a 30-year loan.
The Strategy
- Have your salary paid directly into the offset. Every day that money sits there, it's saving you interest.
- Use a Credit Card for expenses (Wisely). Pay for everything on a card with up to 55 days interest-free. Leave your cash in the offset for those 55 days.
- Pay the card in full automatically. Before the due date, pay the card off from the offset. This way, you use the bank's money for free for 55 days while your money reduces your mortgage interest.
Warning: This only works if you are disciplined. If you spend extra because you have a credit card, you will lose far more than you save.