What is an offset account? How does it reduce the amount of interest I pay each month?

An offset account is a transaction account which reduces the interest payable on your home loan by the amount held in your account. A reduction in interest can also shorten your loan term, as you'll be able to pay your loan off sooner. Most of the offset accounts earn you interest on your savings at a rate higher than a standard savings account. Offset accounts operate as regular transaction accounts, giving you ready access to your funds. Interest earned on the account is automatically deposited into you home loan account, thereby reducing the balance of your loan – which consequently reduces your interest repayments. Because you don't see the interest, you are not taxed on it as you would be with a standard savings account. However, with interest rates paid on savings accounts as low as they currently are, this is unlikely to represent much of a saving. e.g. if you had $10,000 sitting in an offset account for the life of a $320,000 loan, you would save around $46,000 and pay off your loan around 18 months sooner (calculated on 7 per cent interest over a 25-year loan).