An offset account (referred to interest offset) is a separate facility (usually a savings or transaction account) attached to a home loan account. The balance of the offset account is subtracted from the balance of the home loan account and the interest charge is calculated on the aggregate. Because interest is calculated daily this can result in significant interest savings. For example, if a client has their salary deposited into their offset account then the interest charged is reduced for the time that money is in the offset account.
The offset account is essentially a transaction account that offers features such as direct salary credit, ATM card, credit card, cheque book, scheduled payments and BPAY. This allows the client to operate the account as a normal bank account, using EFTPOS and cheque transactions. It is very flexible and is a good way of reducing the loan principal without locking funds away.