A home loan offset account is a bank account connected to your home loan. Your savings and salary can be deposited directly into the account, and the balance is then used to “offset” the amount remaining on your home loan.
The money is still there when you need it, and you can withdraw it as required. But at the same time, it’s constantly working to reduce your interest and make your home loan more manageable.
If you’re new to offset accounts and aren’t sure how they work or what benefits they provide, check out the following guide.
An offset account reduces your total interest by offsetting your mortgage against the account balance.
For example, let’s say that you take out a 25-year home loan for $500,000 and have $50,000 in your offset account.
With a typical mortgage, interest accrues on the full $500,000. With an offset mortgage, you only pay interest on $450,000 ($500,000 – $50,000).
Your $50,000 doesn’t go toward paying off the loan. It’s still there and it can be accessed as needed. But for as long as it remains, it will continue to reduce your interest.
Offset accounts are usually only available on variable-rate loans, whereby the interest rate is subject to market changes. They are much less common on fixed-rate loans, which “fix” an interest rate for a number of years.
Both partial and full offset loans are available.
A partial offset home loan puts part of the balance toward offsetting the mortgage. So, if the partial amount is 50%, only $25,000 of a $50,000 balance will be used to offset the mortgage.
Partial interest rate discounts are also available. In this case, the money in the offset account accrues interest at a lower rate than the home loan.
As the name suggests, “full” or “100%” offset accounts use all the balance to offset the mortgage.
There are some clear and obvious benefits to using a home loan offset account:
On the surface, home loans might seem more economical than personal loans, as the rate is usually much smaller. But that rate is charged every year, and as mortgages typically run for 20+ years, it can add up to an eye-watering sum.
Mortgages also use something known as amortisation, whereby the size of the monthly payment doesn’t change, but an increasingly larger amount goes toward the principal as the loan progresses.
By reducing the total size of your loan principal, offset accounts can greatly reduce the total interest you pay.
For instance, if you have a 25-year mortgage of $500,000 with a rate of 6.54% p.a., an initial offset account of $40,000 will shorten your term by 3 years and 4 months and reduce your total interest by $137,106.
As noted above, offset accounts aren’t just about saving money. You can also reduce the loan term.
In the above example, adding an extra $300 to your offset account every month will shave 5 years off the term and save $204,630.
The more you save, the shorter the loan term will be.
An offset home loan gives you more flexibility than you’d get from paying down your mortgage. After all, while the interest rate and total term will reduce, the money will still be available if you need it.
It can be used for major repair work, renovations, and all those costly little emergencies that appear sporadically and leave you flustered, frustrated, and broke.
Of course, withdrawing the money will impact your savings and affect the interest you accrue, but it’s there if you need it.
As with any major loan, there are a few factors to consider before opening a new offset home loan account:
A good broker can help you with all of this and ensure you get the best possible deal. They will also answer any questions you have and find a product that is tailored towards your specific circumstances.
To summarise, here are some of the key things you need to know about offset home loans:
As with all major financial products, it’s important to seek professional advice before you make a commitment.
If you have understood the terms, considered the benefits, and believe that an offset home loan is right for you, take the plunge today. Contact one of the loan specialists at Fox Home Loans to discuss the next step.