How an offset account can benefit your home loan

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.

What is an offset account?

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.

What are the types of offset home loans?

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.

How can an offset account benefit your home loan?

There are some clear and obvious benefits to using a home loan offset account:

Reduced interest

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.

Accelerating loan repayment

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.

Flexibility and convenience

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.

How to choose the right offset account

As with any major loan, there are a few factors to consider before opening a new offset home loan account:

• Interest Rate: Variable-rate mortgages are subject to market changes, and there has been a lot of those in recent years. If the market experiences a sudden increase, your payments may also increase, so keep this in mind.
• Fees and charges: Some offset home loan accounts charge additional fees, such as a monthly service fee. Make sure you know what you’re getting and how much it’s costing you.
• Features: Do you have any additional repayment options? What about a redraw facility, whereby you can make extra payments and then access that money at a later date? Not all offset accounts are the same, so check the features.
• Maximising the benefits: Can you get the most from your offset mortgage and are you prepared to do so? For instance, you can consider adding savings into the account and depositing your salary directly.
• Flexibility: You may be charged a fee every time you access your funds. There may also be caps on how many times you can redraw if such a feature is available. Flexibility is key, as it gives you the freedom to add and withdraw as needed.

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.

The Bottom line

To summarise, here are some of the key things you need to know about offset home loans:

• They are bank accounts connected to your home loan
• They can reduce the total interest and loan term
• They are typically available with variable interest rates
• Additional fees and charges may apply when opening and using an offset account
• You can pay your salary, savings, and other cash into an offset account

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.