Revolving credits and offset accounts are two great products that can help you saving loan interests. However, we found there are a lot of mysteries around these products and people don’t really know how to choose between them. Today, let’s talk about how these two products work and the pros and cons on each of them.

What is an offset account?

An offset account is a special loan facility that allows you to reduce the amount of loan on which interest is charged, by virtually connect the offset account to your other eligible saving accounts. The sum of savings in your connected accounts can be used to offset the balance in the offset account, and interest will only be charged on the un-offseted amount. Instead of earning interest on those savings, you pay less interest on your mortgage, which in turn can help you paying off your home loan faster.

How an offset account works

The picture below illustrates how an offset account works.

For example, if you have a total loan amount of $500,000, out of which $100,000 is structured as an offset account. Your offset account can now be linked to many saving accounts. Please note that the example only shows 3 linked accounts, but you can link up to 50 eligible ones depending on which bank you are with. If say you have $90,000 saving in total out of the 3 shown linked accounts, then you will only need to pay interest on the difference between the offset balance and the total savings, which is $10,000, as shown in red color.  The interest calculation is based on a floating rate.

Benefits of an Offset account

• you can utilize funds sitting in multiple eligible saving accounts to offset the offset account balance. No interest is charged on the offseted loan amount.
• An offset account can be linked not only to your own accounts but also to the accounts of your immediate family members (parents and children) who are eligible. Please note that special rules may apply if the borrower is a company or trust.
• You do not need to transfer money into the offset account, which makes it convenient to manage multiple streams of savings for different purposes.

The Cons of Offset account

• As your savings are used to offset the loan balance and reduce loan interest, you normally would have to pay, you may receive no interest payment from the linked saving accounts.
• Not all banks offer an offset product.

What is a Revolving Credit account?

A revolving home loan is like an overdraft facility. The key function is also to help you reducing loan interest payment, but revolving home loan works slightly different from an offset account. You can draw funds up to your credit limit and repay balance at any time. The interest is also calculated on daily basis.

How does a revolving credit account work?

Still using the same example, but now the $100k is structured as a revolving home loan. The key difference from an offset account is that you do not link it to any other accounts. Instead, it acts as a transaction account with overdraft, and you deposit funds directly into this revolving account to reduce its balance. Again, interest will only be charged on the remaining balance, which is coloured in red in the illustration.

Benefits of revolving credit account

• It is very convenience to access funds available in the revolving account as it can be linked to a Debit Card. The management of a linked revolving account can be approximated to a credit card.
• The revolving home loan may also provide better traceability of a major purchase, from an accounting perspective. For example, when you bought a car using undrawn loan setting in the revolving account, you accountant can easily trace back the purpose of the loan from your revolving account statement.

The Cons of revolving credit

• Revolving accounts normally have higher monthly fee compares to offset accounts. It is important to note that Westpac has removed monthly fees for both products.
• Funds need to be transferred directly into the revolving account to reduce loan balance, which may not be as flexible as the offset account in terms of saving management.