Offset Home Loans

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An Offset Home Loan includes an offset account that is linked to the home loan account. The offset account acts much like a savings account.

The Offset Home Loan allows deposits of salary, wages, and other savings that are deposited into the offset account to be offset against the balance in the home loan account, thereby reducing the balance, and in turn reducing the interest payable.

For example, if a borrower had $30,000 in a 100% offset account and had a loan balance of $350,000, interest is only paid on $320,000

So, simply the more surplus money a borrower places into the offset account, the more the interest charges can be lowered. Some lenders only offer partial offset accounts and not 100% offset accounts. A partial offset account is where the interest earned is lower than the interest paid on the loan account.  Thus, the interest is only partially offset. You don’t get the full benefit you would with a 100% offset.

With a 100% offset account  the effective loan balance is reduced by $1 for every $1 deposited in the account. So, the more surplus funds a borrower can place into the account the less interest is effectively paid, which can amount to many thousands of dollars over the life of a loan. This also cuts years off the loan term, and you can end up owning the house much sooner.

The longer one can leave the surplus funds in the offset account (to effectively reduce the home loan balance), the greater the benefit.

The offset account is used much like a transaction or savings account, and normally will have other facilities linked to it, like a cheque book, credit card, and possibly a variety of other banking facilities. Surplus funds that were deposited into the offset account can be withdrawn at anytime, as and when needed.

Some lenders require a minimum balance in the offset account. If the balance falls below a set minimum,  the money will not be allowed to be offset against the loan account. 

An offset account is an attractive option to those people that have a reasonable amount of surplus money available from each paycheck once expenses are paid, or a reasonable amount of savings. However,  borrowers that can barely afford to make the monthly home loan repayment and do not have much surplus funds available, probably wouldn’t find this type of loan suitable. They may be better suited to going with a lower interest rate home loan product, such as the basic home loan. It would not be much use to be paying a higher interest rate in order to have an offset account, and not derive much benefit.



Some Pros
-You pay off your mortgage sooner
-The interest you earn can be tax free
-Can withdraw equity form the home loan as needed
-Good flexibility


Some Cons
-Not all lenders offer 100% offset accounts
-Higher interest rate than basic variable home loans.
-Not much benefit to those borrowers that do not have much surplus funds.

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