TL;DR: Offset doesn’t lower your monthly repayments. It reduces the interest charged, which means more of your repayment goes toward the principal. That’s how it saves you money - paying more principal, over time, reduces your loan term, and thus saves you interest.
This isn't just common amongst first home buyers, I also see it amongst more experienced homeowners.
The simple idea it to think of your loan like this... if your loan is $500,000 and you have $50,000 in your offset account, then the bank doesn’t charge interest on $500k - they charge it on $500,000 - $50,000 = $450,000.
Example Scenario
Let’s say your $500k loan is at 5.85% for 30 years, so the monthly repayment is around $2,948.
- Without offset: Interest = $2,417, Principal = $522
- With $50k in offset: Interest = $2,194, Principal = $754
If you're a visual learner - have a look at the below. Yes, I did use ChatGPT for generating this image... but I think it works well enough to explain it.
As you can see - it's the same repayment… but you’re paying off the loan faster. That extra $232 towards your principal counts as an "extra repayment" and usually goes into redraw. As the redraw grows in size (with consistent extras due to offset benefit) it 'snowballs' and continues to make more of your repayment go towards the principal, not the interest.
So, to be clear - you haven’t changed the repayment, but you have increased how much it actually pays down your loan.
Over a full 30-year term, this $50k in offset (if it stays there) would mean the loan would reach a balance of zero after 24 years and 9 months. This reduction of 5 years and 3 months would mean an interest saving of around $186,871.
With Offset (Package) vs Without Offset (Basic)
Often, lenders will offer a basic loan at a lower rate, something like
- Loan A: 5.85% with offset
- Loan B: 5.75% without offset
So you’re paying 0.10% extra for the offset, but how much money do you need in offset for it to be worth it?
In the above example, Loan A has 5.75% without offset - which means it would have repayments of $2,918/month. $2,396 of this would be interest and $522 of this would be principal. If you chose to give up cash (savings) and pay extra into redraw manually, then you would be getting the benefits.
If you had Loan B instead with 5.85% as your interest rate and $50k in offset - it would mean repayments of $2,948/month. This is $30/month higher. But, the effective interest (due to offset benefits) becomes $2,194 and the effective principal becomes $754. This means you're paying $202 less in interest and $232 more against your principal.
At about $8k of savings in offset, for a $500k loan, you're breaking even on the 0.10% higher rate. If you have more than $8k saved, you're doing better and paying off your loan faster than what the additional offset is costing you.
In simpler terms, offset works best if you:
- Get your income paid into it
- Keep savings sitting there
- Don’t constantly drain it
But if you spend everything each month and keep the balance near zero (or below $8k, in this example) then you’re paying for a feature you’re not using.
