An interest offset savings account is a savings account that is linked to a home loan. The amount of the loan on which interest is charged is reduced (offset) by the balance in the savings account.
For example, if a home loan has a balance of $150,000 and there is $50,000 saved in an interest offset savings account, then interest will only be charged on $100,000.
The benefit of this type of account is that a borrower can enjoy the temporary benefit of having repaid part of the principal of their loan, but also retain maximum flexibility as to how they can use the money in the account. This money can be withdrawn as per a normal savings account, which is much simpler than redrawing money that has been physically repaid into a home loan.
Here is a short video presentation from respected finance journalist Ross Greenwood on Channel Nine’s Today show explaining the pros and cons of interest offset accounts. He calls them mortgage offset accounts, but they are the same thing.