When used carefully, a mortgage offset account can cut years off your home loan and save you thousands of dollars.
What is an offset account?
A home loan offset account is a feature available on a range of home loans. An offset account is essentially a transaction account linked to your home loan. The money in your transaction account is used to “offset” the balance of your loan, so you only have to pay interest on the difference.
For instance, if you took out a home loan valued at $300,000 and your offset account had $15,000 in it, you will only need to pay interest on the balance of $285,000. Over 25 years you could potentially save over $22,024 in interest charges (using a rate of 3.29 percent).
How can an offset account be used?
In order to get the most out of a home loan offset account, there must be money in the linked account. The more savings you have in the account, the less you may pay in interest.
Some borrowers arrange to have their wage or salary paid directly into their offset account, and only transfer what they need for everyday budgeting to a separate transaction account. Regularly topping up an offset account like this could potentially help you increase the offset account balance throughout the term of the loan.
Using an offset account is a lot like making extra repayments onto a home loan. However, you can still easily access the money in your offset account if required (such as to cover an emergency expense), without requiring a redraw facility on your home loan (which could have limits, fees, or other terms and conditions).
What are the risks of a home loan offset account?
Keep in mind that while a home loan offset account can help you save in interest on your home loan, it can end up costing you more if you’re not careful.
Generally, home loans with extra features and benefits (such as offset accounts) tend to have higher interest rates, fees and other charges than more basic ‘no-frills’ home loans. If you don’t hold a large enough balance to offset your loan, you could end up paying more for your mortgage.
Some lenders may also set a minimum or maximum balance amount for your offset account. Be sure to check with the financial institution before applying.
How can you get an offset account on your home loan?
You can compare home loans with offset accounts at RateCity, and learn more about their interest rates, fees, features and other benefits to work out which options may best suit your needs.
Even if you can’t get an offset account as a first home buyer, you may be able to refinance your mortgage in the future and switch to another lender that offers an offset account.
If you’re not sure whether an offset account may help save you money, a mortgage broker may be able to offer personal advice on whether or not a home loan with an offset account is the best choice for your financial situation.
