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Say someone has a 100% offset account on their mortgage. This means that if they have:

Loan amount:  $150k
Offset balance:  $100k

...then their interest is computed as if they only owe $50k on the loan. The offset account doesn't accrue interest on its own in this case (as in, the balance doesn't increase), but effectively it's as if the offset account earns interest at the same rate that's applied to the loan. Usually that rate is above what's available on a standard saving account, which is what makes the offset account an appealing option to begin with.

Anyhow, my question is around what would typically happen in the following scenario:

Loan amount:  $150k
Offset balance:  $160k

The balance in the offset account now exceeds the amount payable on the loan. The account-holder pays $0 in interest on the loan, but is also left with a "surplus" of $10k over and above the balance due on the loan.

The question is, would interest typically accrue on this amount, and if so at what rate (as in, would it usually be the bank's standard cash savings rate, the rate of the home loan, or something else?)? Can it make financial sense to fund an offset account over and above the amount outstanding on the loan being offset, or is there basically no reason to ever do something like this?

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    Most offset accounts don't earn interest, so there wouldn't be much of an advantage to having more than the loan amount deposited – Nosrac Sep 29 '17 at 15:17
  • As Nosrac said, but to be sure you could check your account terms and conditions. – Victor Sep 30 '17 at 1:16
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For all offset accounts I have seen in Australia you get no benefit for having more than the amount in the loan account in them.

I have had this situation myself with ANZ when I had paid off one property but maintained the loan while I was looking for a larger property to move to. I paid zero interest on the loan and received zero interest in the offset account.

To earn a bit of extra interest I periodically moved the amounts above the loan amount from the offset account to a interest bearing account

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