Offset vs revolving home loans: what are they and what's the difference?  

If you’ve been considering different types of loans, you might be wondering about offset and revolving loans, sometimes called revolving credit. What are they? What’s the difference between them? And which one should you choose?   

Revolving loans are similar to an overdraft  

A revolving home loan is a transactional account and a home loan rolled into one.  

Typically, a borrower will have some of their loan fixed (an agreed interest rate and repayments set for a period of years), then leave one chunk of a loan floating - a moveable interest rate, usually higher than fixed rates, but with no set repayments so you can pay off more or less as you like.  

The borrower will usually be paid into that account and draw money out as they need it. It acts like an overdraft against their home and they pay interest based on the amount they’ve drawn down. If you put a portion of your loan onto revolving, you can pay that back as quickly as you like but you’re able to re-draw those funds if you need them. 

For people with lumpy incomes, it can be a good way to save money on interest repayments. As wages or bonuses come in, that money sits in the account and reduces interest repayments. But borrowers must be careful not to draw out all the money just because it’s temptingly available – that could result in you paying more interest.   

“My customers who use revolving credit tend to have $20,000 or $30,000 floating, and it can help them pay off a chunk of their loan faster,” says Joanie Rankin, Westpac Mobile Mortgage Manager.

“Also, sometimes property investors like to have the money available as a back-up in case they need it for maintenance.”  

For example, if you had a total loan of $420,000, you might fix $400,000 and make regular payments on that. Then you might leave $20,000 on a floating revolving loan.  

You can try and pay off that $20,000 as fast as you like and only pay interest on the outstanding balance, but the money is still available should you need to re-draw on it.  

Offset loans keep your money separated  

An offset loan has some similarities to a revolving loan. It’s typically used for a small chunk of a larger loan, and it can be a way to pay less interest.  

But instead of acting like an overdraft, interest on an offset loan is paid based on how much you have in a separate account (or more than one) that is ‘offset’ against the loan. Your savings are always separate from your loan and accessible at any time, but they count towards reducing your loan balance. 

Let’s say you split your $420,000 loan into the same two chunks: $400,000 fixed with regular repayments, plus $20,000 in an offset floating loan. In a separate account, you have $15,000 in savings linked to your floating loan. You would only pay interest on $5,000 - the difference between the two. And if you make sure you always have $20,000 in your savings account, you would pay no interest on your offset at all.  

Offset loans still require a monthly payment against the principal of the loan, so the total loan keeps falling, but if the savings balance matches the offset amount, you do not pay any interest.  

“This is actually quite popular, especially among people who have homes already, have some savings, or are on larger incomes,” Rankin says.  

“We also see parents offsetting their own savings against some of their kids’ mortgages to help them reduce repayments for the first few years. It’s a great product when used well.”  

Once again, you need to run the numbers. Savings used as off-set will no longer qualify to earn interest so it pays to check whether this is the best arrangement for all involved. 

Everyone’s situation is different, so get advice to work out the best structure for your home loan based on your own goals. The right set-up can help reduce your interest costs, help you pay down debt more quickly – or both.  

Joanie Rankin, Home Loan Expert

The information above is provided for information purposes only. It does not take into account your personal financial situation or goals and is not a recommendation or opinion in relation to home loans. It is recommended you seek professional advice from your accountant, tax, legal, financial or other professional adviser before making any decisions or acquiring a home loan.

Westpac's home loan lending criteria, terms and conditions apply.