What is an Offset Account?
A common question we get from clients is on offset accounts and how exactly does it work. Put simply, an offset account is a savings/transactions everyday account which is linked to your home loan account. It works to ‘offset’ your home loan balance daily, meaning you are only paying interest on the difference between your principal loan and the balance in your offset account.
How does an offset work?
You can offset your loan 100% with your transaction or savings account. The offset account can either be linked to a variable rate loan – which is more common – or a fixed-rate loan depending on the lender.
For example, if you have a home loan balance of $300,000 and you have $40,000 in your offset account, you will only be paying interest for a home loan balance of $260,000.
With a smaller amount to charge interest on, you could save thousands as you pay off your home loan.
How is interest calculated on an offset mortgage?
As mentioned above, interest is only charged on the difference between your principal home loan and the balance in your offset account.
Here is an example to better explain how this benefit would play out over time. The variable interest rate in this hypothetical is 4.5% against a $300,000 home loan.
Does an offset account reduce monthly repayment?
This will depend if it's an principal and interest home loan or an interest-only home loan:
Principal and Interest - with this, your monthly repayment doesn't change. What changes will be the amount of interest you pay on each repayment.
Interest Only - Your payment will be reduced accordingly to the net interest repayment.
What is the difference between an offset account and a redraw facility?
Redraw facilities and offsets accounts are both common features of a home loan that help reduce the amount of interest you pay. However, there are a few key differences to keep in mind when deliberating between the two.
With offset money is accessible when you need it where you'll need to make a request to withdraw money with a redraw
Offset can allow you to set savings while with redraw, you can only access redraw if you have made extra repayments above the minimum requirement to your home loan
Offset can require discipline are funds are easily accessible.
Offset vs savings account - Do I earn interest in an offset account?
No – the point of an offset account is to reduce the amount of borrowed money on which you are paying interest and to shorten the lifetime of your loan.
What is the benefit of an offset account?
Even a relatively small sum of money in an offset account could shed years off a home loan. And, while you are minimising the interest you pay, you can quickly gain access to your savings should you need them. Effectively, this is reduce the loan term and help you pay off your home loan sooner.
Can you have an offset account on a fixed loan? In general most lenders do not have offset on fixed home loans. However, there are lenders that do offer such feature. What you need to be aware is if it's a partial or 100 percent offset.
Can you have more than one offset account?
This depends on the lender. Some will only allow one offset per a loan account while others can allow up to 10 offset account to help you manage savings and budget requirement.
What else do I need to know?
When selecting a home loan to pair up with an offset account, here are some features to keep in mind:
100% offset: Pick an account which allows for 100% of the account’s balance to offset your home loan
No minimum balance: Pick an account without a minimum balance, so any amount of savings can offset your home loan
No maximum balance: Pick an account without a maximum balance, so you can increase your offset and decrease the amount of interest accruing on your home loan
Low or no fees: Fees associated with an offset account are one of the features shortcomings. Try to look for low or no fees to maximise your benefits