An offset account can help you save thousands of dollars in interest so you can pay off your home loan faster
18 February 2022|4 minute read
Whether you’re getting your first home loan or refinancing your current loan, it’s smart to look for ways to save on home loan interest.
Opening an offset account may be one such way to pay less interest and work towards repaying your mortgage sooner.
In this article we’ll explain what an offset account is, how it works, the fees involved, the pros and cons, and how it differs from a redraw facility.
An offset account is a special kind of transactional bank account that is connected to your home loan balance.
Any money in this account offsets your overall home loan balance, reducing the amount of interest you can be charged.
So essentially, the funds in your offset account are subtracted from the total outstanding home loan balance to determine the loan amount upon which interest is charged.
Interest is calculated daily, so you’ll pay interest on a smaller loan amount if you have money in an offset.
You need to have funds in your offset account in order to experience the benefits. So, start by depositing savings into the offset account just like you would with any other bank account.
The money in your offset account can be easily accessed just like an everyday bank account, but you’ll make higher interest savings with a higher offset balance.
Here’s an example of how an offset account can help you spend less on home loan interest:
If you have a $200,000 home loan balance and $30,000 in an offset account, you’ll only be charged interest on $170,000 of your mortgage.
However, let’s say that the next day you decide to take out $2,000 from your offset to book international flights. Your offset account funds will decrease to $28,000 and the interest charged on your home loan will now be based on a $172,000 loan balance ($200,000 minus $28,000).
Most lenders charge a monthly or annual offset account fee. The cost varies between lenders but may come to around $10 per month, or a yearly fee of $200-$400. The latter amount is likely to be a home loan package fee, which covers all account keeping fees in addition to your offset account.
Some lenders won’t charge any fees for an offset account, although they may factor any managing expenses into the interest rate they offer.
Since offset account fees can vary significantly, it’s smart to take the time to research your options. Always consider the home loan as a whole, and speak to a mortgage broker if you need guidance.
Before you make the move to open an offset account, it’s important to do the maths and check whether it makes financial sense for you.
Since most lenders charge some kind of fee to operate an offset account, it’s smart to ensure that your interest savings will outweigh any fees.
Some borrowers make the mistake of paying for an offset account that they aren’t using. This could be costing them hundreds of dollars every year.
There are two types of home loan offset accounts. Both can help you pay less home loan interest and reduce your loan term.
If you have a fixed rate home loan, you may be able to get an offset account but it depends on the lender. Some lenders allow for partial offset accounts, but may heavily restrict access to a 100% offset.
On the other hand, if you have a variable rate home loan, you shouldn’t have too much trouble opening an offset account.
It depends on your home loan objectives and current financial situation. If you’d like the flexibility to dip into your savings as you please, an offset account may be a more suitable option.
However, if eliminating your mortgage debt and reducing the size of your loan is your goal, it would make more sense to pay off your loan directly.
If you’re feeling conflicted about whether to put your funds into an offset or pay off your loan, you might want to consider opening a redraw facility. Keep reading to find out more about how a redraw facility could help you.
Both offset accounts and redraw facilities are both home loan features that can help you pay less interest, but they are pretty different in how they work.
While an offset account is like a bank account linked to your mortgage, a redraw facility gives you the option to withdraw any extra repayments you’ve made towards your home loan. That is, if you have made any home loan repayments in addition to the minimum required repayments, you can draw back these funds.
With a redraw facility, you will typically be charged a withdrawal fee for any redraws you make. Withdrawing funds from a redraw facility won’t usually be as quick in comparison to an offset account.
Not sure whether opening an offset account is the right move for you? Speak to your local Aussie Broker to find out more about your home loan options.