What is an offset account?
An offset account is a transaction account linked to your home loan. It can help reduce the amount of interest you pay on your home loan meaning you may be able to pay off your loan sooner than anticipated! You can still make deposits and withdraw from your offset account but the more money in your offset account, the less interest you’ll pay!
Usually, to offset your home loan you will need to have a variable interest rate on your loan although some lenders do offer an offset feature on fixed rate loans, you just have to find them!
How do I use it?
It really depends on the individual’s preference but to get the most out of it we recommend to set up your pay cycle to deposit directly into the account and use it for regular savings. Some banks will allow you to have multiple accounts to help you keep track of things.
How does it work?
If you have a $500,000 home loan and deposit $20,000 into your offset account, you will now only be charged interest on $480,000 instead of the full $500,000 loan. You will still pay the same minimum monthly repayment but the interest component will be lower and you will therefore be paying more off the principal. This will continue to occur as long as you keep that amount in the offset account.
Benefits of an offset account?
- The balance in the offset account will offset daily against the home loan principal, reducing the amount of interest you pay, and therefore save you money
- Separate account to your home loan, some lenders can make you hold payments in advance if funds sitting in redraw on your home loan, if funds in an offset this is not possible
- For investment loans they help preserve tax benefits because of how the ATO views the use of an offset account.
Negatives of an offset account
- Generally incur a monthly or annual fee
- Some lenders charge higher interest rates on their mortgages that have offset accounts
- Need to maintain a large balances in the account to see the benefits
When you are setting up your home loan or refinancing loans it’s a really good idea to check in with a broker for the absolute best structure for your exact circumstances.