When it comes to selecting the right home loan, it’s important to understand certain features that can help you save money and shave time off the life of your loan. A mortgage offset account can be a powerful tool to help you get ahead of your repayments by reducing the amount of interest payable on your loan.
A mortgage offset account is a type of transaction or savings account linked to an eligible home loan (typically a variable rate home loan and some fixed and split rate home loans). The lender treats the savings you have in an offset account as money you’ve paid towards your home loan, and only charges you interest on the “remaining” balance of your loan. Offset accounts act as a financial buffer, because you are paying less in interest on your home loan.
As an example, if you had a $400,000 variable rate home loan, you could place $150,000 in a linked offset account. Depending on the type of offset account, this would mean you would only need to pay interest on $250,000; the remaining loan balance.
There are two types of offset accounts available: 100% offset accounts and partial offset accounts.
100% offset accounts: These are the most common form of offset accounts, and are typically available with variable rate home loans. The full amount of money in these offset accounts is offset against your remaining home loan balance. This means you’re only paying interest on the outstanding amount of your loan.
Partial offset accounts: These accounts are like 100% offset accounts, however the balance in the account only partially offsets your loan.
For example, if you had $20,000 in a 50% offset account, only 50% of the savings amount ($10,000) would impact the balance of the loan. In practice, this example would mean that a $300,000 loan would attract interest on $290,000. Take a look at our table below for more detail.
|Loan Amount||Amount in 50% partial offset account||Amount in 50% partial offset account that impacts the loan balance
|Remaining loan balance that attracts interest|
Partial offset accounts are typically less effective than 100% offset accounts.
An offset account can help you pay off your home loan faster and save you money on interest payments. Any amount in your offset account will help you save on interest and potentially reduce the life of your loan, which is especially true for sizeable account balances.
Our example in the table below puts into perspective how much interest you could save with money in an offset account. In this hypothetical situation, the borrower owes $400,000 on their home loan over a 30-year loan period with an interest rate of 4.5%. Here is the difference an offset account could make:
|Amount in 100% offset account||Monthly repayments||Amount paid in total||Interest saved||Time saved on home loan||Updated loan term|
|$0.00||$2,026.74||$ 729,626.85||$0.00||0 years, 0 months||Still 30 years|
|$20,000 (from beginning of loan)||$2,026.74||$ 677,547.38||$52,079.46||2 years, 2 months||27 years, 10 months|
This scenario shows that the borrower with $20,000 in a 100% offset account from the beginning of their loan could save around $52,000 in interest, as well as shave off around two years off the life of their home loan.
Your minimum monthly loan repayments do not reduce with an offset account, which helps you pay more towards your principal loan, and less towards interest.
If interest rates increase, an offset account can help tackle major increases to your home loan repayments. How? As any amount in your offset account reduces your loan’s principal amount, you are charged less interest on your loan accordingly. So, if interest rates increase, you will be paying interest on a smaller loan, which can potentially save you money in the long run.
You can have your salary deposited into your offset account to increase the amount you’re putting towards your principal loan. You can also dip into your account by setting up direct debits for any bills, as well as use a debit card for everyday purchases. Offset accounts can also offer peace of mind by having readily accessible funds for any emergencies.
Both a mortgage offset account and a redraw facility offer certain benefits and disadvantages to those with home loans – and these can be interchangeable depending on your needs and spending habits. When it comes to money availability, offset accounts are just like an everyday account, as the balance is available at all times. However, when trying to withdraw money through a redraw facility, you need to make an application. This means money isn’t instantly accessible when you need it.
Furthermore, redraw facilities only allow access to extra repayments you have made towards your remaining home loan, whereas you can access all of your savings in your offset. This can be beneficial for some borrowers, as contributing extra repayments directly towards your mortgage will help you pay off your loan faster – so long as you don’t continuously withdraw from these payments.
When it comes to account-keeping fees, offset accounts typically have low or no fees and some transaction fees, compared to an often mandatory redraw fee when taking out money from your loan.
When placing any money into your offset account, your lender treats it as a repayment on your principal loan amount, thereby offsetting interest on your loan. As everyday savings accounts don’t offset your home loan, you won’t reap such benefits.
You may want to consider the following tips when it comes to choosing the right type of offset account:
It’s important to understand the different way you can maximise your money over the life of your home loan. These strategies should be taken as a guide only, and should be weighed up against your individual needs:
It can be difficult to locate the right home loan for your needs – that’s why we offer our free and easy home loan comparison service that takes minutes to complete, and saves you the time and effort from searching through multiple websites.