Offset Accounts vs Revolving Credit: Which Is Right for You?
Offset accounts and revolving credit are both clever tools that let your spare cash work against your mortgage instead of sitting in a low-interest savings account. They are similar in spirit but work quite differently in practice. Choosing the right one depends on your cashflow pattern and how disciplined you are with structured budgets.
How an offset works
An offset account is a regular transaction account, but the balance is offset against your mortgage when interest is calculated. If you owe 600,000 on the mortgage and have 30,000 sitting in the offset, the bank calculates interest on 570,000.
The mortgage itself is a normal table loan. Your repayment does not change month to month — it stays at the contracted amount based on the original balance. The benefit comes through faster principal reduction, because more of each payment goes to principal once interest is reduced.
You can have multiple offset accounts in some bank programmes, which is useful for joint borrowers each holding their own offset balance.
How revolving credit works
A revolving credit facility is structurally a giant overdraft secured against your home. The credit limit is set when you take it out, and you can drift the balance up or down to that limit at any time. Income from your salary lands on the revolving credit, reducing the balance. Spending pulls the balance back up.
If you spend nothing, the balance drops to zero and you pay no interest. If you fully utilise the limit and never repay, you pay interest on the full balance. In effect your full income works against the mortgage until you spend it.
The fundamental trade-off
The simple way to think about it:
- Offset: Your savings reduce the interest calculation. Best when you have a chunk of cash you do not want to spend.
- Revolving credit: Your income, in and out, reduces interest. Best when you have variable or lumpy income.
When offset is the better choice
- You have an emergency fund of 10,000 to 50,000 sitting in savings already
- Your income is regular and predictable
- You want clean separation between your everyday banking and your mortgage strategy
- You prefer simple structure with no risk of "creeping" balance
When revolving credit is the better choice
- You are self-employed and income arrives in lumps
- You hold significant cash flow buffers between business GST or tax payments
- You are disciplined with budgeting and will not let the balance creep up
- You want maximum savings from every dollar of income
The risk with revolving credit
It is psychologically easy to spend the limit. Without discipline, a revolving credit facility just becomes an expensive home-equity-funded lifestyle. Most people who use it well treat it like a separate "mortgage" account and avoid spending directly from it.
Most clients use both
In practice many of our clients carve their mortgage into pieces — say a fixed table loan at the bottom for stability, a small floating portion in the middle, and a revolving credit at the top for income management. Layered properly, this gives you stability, flexibility, and maximum interest savings.
Talk to SMS Loans about whether your current loan structure makes the best use of these tools. Sometimes a small restructure — at no cost — saves several thousand dollars a year.