Mortgage Offset Calculator

How an Offset Reduces Interest

An offset account reduces interest because the lender charges interest on the loan balance less the money in the linked account. With $600,000.00 owing and $50,000.00 in the offset, interest is charged on $550,000.00. At 6% a year, the first month's interest falls from $3,000.00 to $2,750.00 in this calculator's monthly model.

The offset money still belongs to the borrower and does not repay the loan. The monthly repayment stays the same, so the $250.00 of interest not charged goes to principal instead. Each month the loan balance falls a little faster, and the debt clears sooner.

Only a balance up to the loan amount counts. A client holding $150,000 against a $100,000 loan pays $0 interest, and the extra $50,000 earns nothing. The calculator applies the same cap that ATO Taxation Ruling TR 93/6 describes for offset arrangements. The loan itself still needs repaying, so the offset stops interest only while it covers the balance.

Offset Versus Extra Repayments

Keeping cash in an offset and paying the same cash into the loan produce the same interest when the rate and repayment stay the same. Paying $50,000.00 off the example loan leaves $550,000.00 owing, the same balance that attracts interest with the offset. The comparison table shows identical interest and payoff timing for both, before fees.

The differences are access, tax and the loan's conditions. Moneysmart's offset account guide explains that offset savings can be withdrawn whenever the borrower needs them. Money paid into the loan reduces the debt, and getting it back depends on the loan's redraw terms. Moneysmart also notes that some lenders charge for an offset through a higher rate, account fees or both.

Tax treatment matters for an investment loan. ATO Taxation Ruling TR 2000/2 treats money redrawn from a loan as borrowed again. Interest on it is deductible only to the extent the redrawn money is used to produce income. Under TR 93/6, offset arrangements are generally structured so the account earns no interest and creates no taxable interest income.

To model a redraw, enter the amount and the month it is taken out. The extra-repayment column adds it back to the loan, up to the extra money paid in by then. The offset column withdraws the same amount from the offset. Both raise the balance that attracts interest by the same amount, so the interest effect matches. The loan contract decides whether the lender permits that redraw, and TR 2000/2 notes that some redraws need the lender's consent.

To compare a Westpac or ING offset loan, enter that loan's rate and fees here. Westpac's offset page says 100% of the linked transaction account balance is offset against the loan each day. ING's Orange Advantage page lists a 100% offset when the loan is linked to an Orange Everyday account. The lender's actual rate and fees decide the result.

Reading Savings and Fees

Interest saved compares the offset with the same loan and repayment and no offset. In the example, total interest falls from $695,031.35 to $492,855.03, saving $202,176.32. The offset covers the loan after 24 years 2 months, which is 5 years 10 months sooner.

Offset fees appear separately, before the net saving. The calculator charges the yearly fee at the start of each loan year until the offset covers the loan. The example's $300.00 yearly fee over 25 years costs $7,500.00, leaving a net saving of $194,676.32.

A small offset balance can cost more than it saves. On the same loan, $1,000 in the offset saves $5,010.78 of interest, while a $395 yearly fee costs $11,850.00. The saving after fees is -$6,839.22.

A higher rate on the offset loan is also a cost. Run the calculator once at the offset loan's rate with its fee, then again at the basic loan's rate with $0 fees. The extra-repayment column of the second run shows the cost of the basic loan with the same cash paid in.

A fixed offset balance simplifies daily account movements. Lenders usually calculate interest daily, so salary deposits and bill payments change the balance through each month. Enter the average balance you expect the account to hold. Use the monthly amount for regular savings that stay in the offset.

Leave the repayment blank to use the minimum monthly repayment for the balance, rate and term. The mortgage calculator shows weekly and fortnightly repayments for the same loan. Export CSV to open every month in Excel. Each month's offset interest is the loan balance less the offset, but not below zero, multiplied by the annual rate divided by 12.