Offset calculator

How an offset account calculator works out the saving

Interest on a home loan is charged on the balance owing, worked out daily. A 100% offset account is netted off that balance first, so the lender charges you on the difference rather than on the full debt. The money is still yours and you can spend it tomorrow.

That makes a dollar in the offset worth exactly your loan rate, and the saving is not income, so it is not taxed. A savings account has to beat your loan rate before tax to match it. If tax takes a third of your savings interest, an account paying 6% in offset terms would need to pay 9% before tax to draw level.

Leave the monthly contribution at zero and the same $20,000 still saves about $91,600 and finishes the loan just over two years early. The balance does the work whether or not you add to it.

Partial offset, 100% offset, and more than one account

A 100% offset nets off every dollar. A partial offset nets off only a share of the balance, and the share is set by the product. It is the single most important thing to check before you assume the number above applies to you.

The arithmetic is unforgiving. In a partial offset that counts 40% of the balance, $20,000 behaves like $8,000, so at 6% it saves $480 of interest in a year rather than $1,200. Same money, same rate, less than half the result.

Some loans allow several offset accounts against the one loan, which suits people who bucket their money into a bills account, a holiday account and an emergency fund. The balances add together and the loan sees the total. The calculator takes one figure, so add your accounts up before you type it in.

• Whether the offset is 100% or a partial one, and what percentage it counts
• Whether it is linked to this loan or sitting against a different account
• How many offset accounts you are allowed against the one loan
• Whether the offset is available on the fixed portion of your loan, or only the variable one
• What the loan costs in fees and rate compared with an equivalent loan without the feature

Why your repayment does not drop

An offset does not reduce the amount that leaves your account each month. The scheduled repayment was set when the loan was written and it stays where it is, which is why the tool shows it as a separate row that does not move.

What changes is the split inside that repayment. On a $600,000 loan at 6%, the first month's interest is $3,000, and with $20,000 in the offset it is $2,900. The repayment is unchanged, so an extra $100 comes off the principal that month instead.

Do that every month and the balance falls faster than the schedule expects, which is why the loan finishes early rather than getting cheaper along the way. The benefit shows up as time, not as cash flow.

The package fee, and the balance that pays for it

An offset usually comes attached to a packaged loan with an annual fee. That fee is a real cost and it has to be earned back before the offset is doing anything for you. The break-even is one division and you can do it in your head.

1. 1

   Take the annual fee

   Whatever the loan charges each year for the package the offset sits inside. Use the actual figure from your loan documents, not an average.

2. 2

   Divide it by your rate as a decimal

   At 6%, divide by 0.06. A $395 annual fee divided by 0.06 is $6,583, so call it $6,600.

3. 3

   Compare that with the balance you genuinely hold

   $6,600 sitting in the offset for a year at 6% saves $396, which covers the $395 fee and leaves a dollar. Below that balance the fee is costing you more than the offset returns.

Note what that break-even is sensitive to. A lower rate raises the balance you need, because each dollar in the offset is doing less work. A higher fee raises it in a straight line.

It is also not the whole comparison. A package fee often covers more than the offset, and the rate discount attached to it can be worth more than the fee costs on its own. Compare the total cost of the two loans over a few years rather than the fee in isolation.

Offset versus redraw

Both reduce the interest you are charged and they are not the same thing. Money in an offset is your money sitting in a bank account. Money in redraw has already been paid to the lender and you are asking for it back.

That last row is the one that costs people money. If you pay extra into an investment loan and later redraw it to buy a car, the redrawn portion is generally treated as a new borrowing for a private purpose, and the interest on it is not deductible. An offset avoids the question entirely because the money never became a repayment.

We are not tax advisers and this is general information, not advice on your circumstances. If you hold or plan to hold an investment property, get your accountant's view before you choose between the two.

What a mortgage offset calculator cannot tell you

This is an estimate built from the five figures you typed in. It is not an approval, a quote or a statement of what any lender will offer you, and the real result depends on the product you end up in.

• It holds your rate steady for the whole term, which no variable loan has ever done
• It assumes a 100% offset, so a partial offset will save less than shown
• It does not deduct the package fee, or any other loan fee, from the saving
• It assumes the offset balance stays put and grows by the amount you entered
• It does not model a fixed portion, where the offset may not apply at all

That fixed loan point is worth its own line. Fixed rate loans frequently come with no offset, or with one that only counts a limited balance, so a borrower who fixes the whole loan can lose the feature they were counting on. If you want both, a split is usually the answer.

Which loans carry a genuine 100% offset, at what fee, and whether the rate on them stacks up is exactly the comparison we run across a panel of more than 40 lenders. Call us on 1300 813 113 and we will price it against your actual balance rather than an example one.