How offset accounts can strip years off your home loan

An offset account is a transaction account that is linked to your home loan, designed to reduce how much interest you pay on your mortgage.

The account’s balance is ‘offset’ daily against your home loan balance, meaning you’re only charged interest on the difference between the total loan and offset amount. For example, if your outstanding home loan amount is $300,000 and you have $50,000 sitting in your offset account, you’ll only pay interest on $250,000 of your home loan amount.

Offset accounts reduce the portion of your home loan that’s acquiring interest. This cuts down your interest rate repayments and can significantly shorten the life of your home loan. The reason why a lender charges you less in interest is because they’re not charging you interest on the complete, actual remaining balance of your loan.

You won’t earn interest on savings held in an offset account, as the balance is offsetting the interest charged on your home loan. So you’ll need to make deposits into the account for your funds to grow. Ultimately, the more money you have in your offset account, the more money you can save.

An offset account works much like a regular transaction account, having an account number and BSB; this means you can deposit funds and make withdrawals and payments using methods including online transfers, debit card, smartphone, tap and pay, or BPAY. (Keep in mind that if you withdraw funds, this will reduce the balance that will be ‘offset’ against your home loan balance.)

There are two types of offset accounts available:

• 100 per cent offset account:
  Deemed the most popular of the two, this offsets the interest payable on the linked mortgage by the full balance of the account. This may be available for variable or fixed rate home loans.

• Partial offset amount:
  As the name suggests, this only offsets your mortgage by a portion of the offset account balance. This means the higher the percentage of the offset amount, the more you’ll save in interest on your mortgage. For example, if you had a loan of $350,000 with $50,000 in a linked 50 per cent offset account, you would only pay interest on $325,000 of your balance. Bear in mind that this is typically more common for fixed-rate home loans.

An offset account is a valuable tool for reducing the overall amount of your home loan but it can come at a cost. Let’s weigh up the pros and cons of this feature so you know what you’re getting into before you set up your account.

The advantages of an offset account are outlined below. 

• Pay less interest on your home loan:
  An offset account has the potential to strip years off your home loan and save you thousands of dollars in interest. The bonus is you don’t necessarily need a huge sum of savings to reap these rewards - with a 100 per cent offset account, every cent is saving you money in interest on your loan.
  
  
• Get your savings to work harder for you:
  Your home loan interest rate will typically be higher than the interest rate you earn on a savings account. Therefore, your savings may work harder for you in an offset account compared to a regular savings account.
  
  
• Pay less tax:
  Additionally, the interest you save using an offset account will not be taxed, unlike the interest you earn on a savings account which will be taxed.
  
  
• Have extra funds on hand:
  With an offset account you can keep excess funds at hand, while simultaneously reducing interest payments on your mortgage. If your financial situation changes, or if something unexpected happens that you need to fork out funds for, you should be able to easily access the money offsetting your mortgage.

The disadvantages of an offset account are outlined below: 

• Potential for fees:
  You may have to pay an additional fee for a home loan with an offset account.
  
  
• Potential for higher interest rate:
  Home loans with an offset account may have a higher interest rate than those that don't.

To give you an idea of how much you can save using an offset account, here’s an example of holding either $20,000 or $40,000 in an offset account against a $400,000 home loan.

As you can see, even the smaller offset amount could save you thousands of dollars in interest over just three years.

There are many factors that can affect how much you save using an offset account, including your home loan balance, interest rate, how much money is sitting in the offset account, when you put it in there, and how long it stays there.

With this being said, there are several things you can do to maximise your savings with an offset account. These include:

• Adding money early:
  If you add $15,000 to your offset account at the beginning of a 30-year loan, it will save you more than if you added that money five years into the loan. Any amount, even $1,000, will have a long-term impact.
  
  
• Adding money often:
  The more money in your offset account, the more money you’ll save in interest. So, regularly adding extra savings into your offset account will help reduce how much interest you pay. If you want, you can have your salary or wages paid directly into your offset account so that your money is offsetting your interest during the month before you even spend it.
  
  
• Limiting withdrawals:
  Taking money out of your offset account is easy to do and works in the same way as withdrawing money from a bank account but you need to keep in mind that any withdrawals will readjust the calculation on your loan repayments. To make the most of your offset account, try to keep as much money in it as possible; this may mean paying bills on the last possible due date, so your money is offsetting your interest for a few days more.

There are a number of things you should consider when choosing a home loan with an offset account, including:

•  Whether you want 100 per cent of your total balance offset against your loan, or just a portion
•  No minimum or maximum balance
•  Low or no fees
•  The ability to use your offset account for the transaction types you need
•  The ability to link multiple accounts as offset accounts to your loan
•  The home loan internet rate
•  Whether the offset account is linked to a variable rate home loan or fixed rate home loan and the conditions or limitations that may apply to each one.

Offset accounts and redraw facilities are both common home loan features; however, they’re very different when it comes to accessibility, flexibility and control. 

Here’s what sets the two apart, so you know the difference:

• An offset account can house your spare savings, while a redraw facility is only available for any additional repayments you have made to your usual monthly repayments. You can therefore only ‘redraw’ the extra that you’ve already paid.
• While both of these accounts are attached to your home loan, how you access the funds differs dramatically. You can generally access money in an offset account whenever you want, whereas you need to make an application to withdraw money from a redraw facility, so the funds aren’t always accessible on the same day.
• Another point of difference is fees. While withdrawing funds from an offset account usually has no or low fees, redraw facilities may come with a mandatory redraw fee.
• Money in an offset account belongs to you, whereas extra repayments belong to your lender.