Refinancing to Add an Offset Account: What to Know

If your current loan has no offset account, you may be able to add one by refinancing, and it could change how much interest you pay each month.

We know the idea of changing lenders can feel like a lot. You have a home, a routine and a loan you have been paying for years. This guide walks you through what an offset account does, what it can cost, and how to decide if a switch makes sense for you.

What Is an Offset Account and How Does It Work?

An offset account is a transaction account linked to your home loan, and the balance in it reduces the amount of your loan that interest is charged on. If you owe $500,000 and keep $20,000 in the offset, interest is generally worked out on $480,000, while your required repayments stay the same.

Your money stays available, so you can still use it for bills and everyday spending. Many households park their pay, savings and a buffer in the offset. Each dollar sitting there works quietly in the background.

The trade-off is that offset accounts often come with a package fee or a slightly higher interest rate than a basic loan with no features. That cost needs to be weighed against the interest you could reduce, and it works best when you hold a meaningful balance in the account.

When Does It Make Sense to Refinance for Better Features?

Refinancing for features makes sense when the way you use your money would gain from them, and when the savings are larger than the cost of switching. A home loan refinance is not only about chasing a lower rate.

There are a few common moments when homeowners look at it:

• Your fixed rate period is ending and your lender is moving you to a variable rate. Our page on fixed rate expiry explains what to expect.
• You have built up savings sitting in a separate account earning little.
• Your income has grown or your life has changed, and your old loan no longer suits you.

Switching can also bring costs. These may include discharge fees from your current lender, application or settlement fees with the new one, and possibly break costs if you leave a fixed rate early. A broker can ask your lender for the exact figures before you decide anything.

Is an Offset Account Worth It? A Worked Example

An offset account is worth it when you hold a steady balance in it, because the interest saved depends on how much sits there and for how long. The example below uses an illustrative rate of 6.75% p.a., which is not a current offer.

Consider a homeowner in Melbourne's inner north with a $500,000 loan and $40,000 in savings spread across everyday and savings accounts. Their current loan has no offset, so interest is charged on the full $500,000.

After a loan review, they refinance to a loan with an offset account and move the $40,000 across. At the illustrative 6.75% p.a., interest on $500,000 is about $33,750 over a year. With $40,000 offsetting, interest is charged on $460,000, which is about $31,050. That is a difference of roughly $2,700 a year, or about $225 a month, before any package fee.

If the new loan carries a $395 annual package fee, the net gain is still around $2,300 in the year, as long as the balance stays in the offset. If the balance fell to $5,000, the interest saved would be only about $338 a year. That is less than the $395 fee, so the borrower would be about $58 a year worse off, before any switching costs. The numbers are a guide only, so use a calculator with your own loan details.

Offset Account or Redraw: Which Suits You?

An offset account keeps your savings separate from the loan, while redraw lets you pull back extra repayments you have already made. Both can reduce interest, but they work differently.

With redraw, extra money goes straight into the loan and you ask the lender to send it back when you need it. Some lenders limit how often you can redraw, or set minimum amounts. With an offset, your cash sits in an everyday account and you can use it as normal.

There is a trade-off. Redraw is often available on lower cost loans, and an offset account may come with extra fees. If you rarely hold spare cash, redraw may be enough. If you like having a visible buffer, an offset can feel more comfortable.

If you are an investor, ask about how an offset interacts with your tax position. Some people prefer to keep extra repayments and deductible debt in a certain way, so speak with your accountant before you set it up. Our investment loans team can work alongside them.

What Happens During the Refinance Process?

The refinance process usually starts with a conversation about your goals, followed by comparing lenders, lodging an application, a property valuation and settlement between your old and new lender.

We start by looking at your current loan, your savings habits and what you want from the loan. A loan health check is a good first step, as it shows whether your current loan still suits you. We then compare lenders and explain the costs and trade-offs in plain words.

Your new lender will usually want recent payslips, statements for your existing loan and accounts, and proof of identity. They will also assess your borrowing capacity and value your property. Once approved, the new lender pays out your old loan and your offset account is set up. Timing varies by lender, so we keep you updated along the way.

A useful tip: before you settle, check whether the new lender lets you link more than one offset account. Some do, which can help if you want separate pots for bills, holidays and savings. Not every lender offers this, so ask early.

Why Talk to a Broker Before You Switch?

A broker can compare many lenders and explain the costs of switching before you commit, so you are not guessing. Sometimes the answer is that staying put, or asking your current lender to add a feature, is the right call.

We would rather you make a choice that suits your life than rush into a switch. If an offset account will not save you money, we will say so. If it will, we will show you the numbers and handle the paperwork with you.

Call one of our team or book an appointment at a time that works for you. We will review your loan, talk through your goals and give you a clear picture of your options, with no pressure.

Frequently Asked Questions