Getting a home loan with the right features is one of the simplest ways to reduce your costs in the long term. A mortgage offset account is one feature that could make a huge difference, potentially saving you thousands of dollars per year, and may help you repay your mortgage sooner.
What is a home loan offset account?
What is an offset account and how does it work?
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 (assuming monthly principal and interest repayments at an interest rate of 3.29%).
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.
To make this facility more effective, you may choose to have your salary paid directly into your offset account to maintain a balance. You can then transfer amounts out of your offset account into your transaction account to use for your day-to-day spending. This will keep funds in your offset that can reduce the interest paid on your mortgage and help you budget better if you only withdraw the money you need.
Does offset account reduce monthly repayments?
Keeping money in an offset account doesn’t typically reduce your monthly repayments. The funds in an offset account reduce the amount of interest charged on a loan, meaning a larger part of your regular repayment will be used for paying down the principal. This means you’ll be repaying your home loan faster while saving money on interest.
What are the benefits of a home loan offset account?
Depending on your financial situation and goals, there could be some benefits of using a home loan offset account:
1. Reduce the interest on your home loan
If you have some savings available, putting them in a mortgage offset account could help make your money work harder for you. This may not save you money on your regular repayments, but may save you money in the long term by lowering how much you pay in total interest and helping you repay your home loan sooner.
For example, assuming you have a $500,000 mortgage, an interest rate of 3 per cent per annum and a 25-year term, you might pay $2371 per month for your home loan, costing you $711,317 in total.
Now assume you also had $40,000 in your offset account, so you’d effectively only be paying interest on $460,000. If you kept making repayments of $2371 per month, you could pay this back in 22 years and 2 months, and pay just $670,178 in total. That’s a savings of $41,139.
Savings on $500,000 home loan at 3% interest
Time to pay off loan
With $40,000 in offset
22 years, 2 months
Source: RateCity. Calculations are estimates and for illustrative purposes only. Calculations do not account for changes in interest rates or fees over time.
2. Potential tax benefits
Another potential benefit of putting your savings into your mortgage offset account may come at tax time. Interest earned on money in a savings account counts as income, which the tax office will want to know about. But money in your offset account helps to reduce the interest charged on your mortgage, rather than earning interest, so it shouldn’t risk increasing your taxable income.
You may find it a good strategy to put any extra income or windfalls, including profits from investments, into an offset account to lower your mortgage repayments and potentially save on tax as well.
3. Easily accessible
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?
Despite the benefits, there are also some potential disadvantages of an offset mortgage that you need to be aware of. Some of these include:
- A mortgage with an offset account may have a higher interest rate than a mortgage without it.
- Some lenders may also charge a monthly account-keeping fee.
- Some lenders might also charge you each time you withdraw money from the account.
Is an offset account worth it?
Whether using an offset account would be beneficial for you depends on your financial situation and goals. One way you could calculate whether an offset mortgage is worth it is by calculating your annual costs versus the expected savings. Usually, an offset mortgage is most helpful if you can keep a reasonable sum of money in your offset account.
If, however, you think you’ll be paying more than you save, it might be worth considering a basic no-frills home loan. Paying an extra fee for a feature, like an offset account, when you only have a few hundred dollars saved in the account may even leave you worse off.
It’s also helpful to read the fine print when comparing offset mortgages. Some only offset a percentage of the account’s balance and not all of it. For example, with a 50 per cent offset account, only half of the balance in your account will be used to offset your outstanding loan.
Some lenders may also have a minimum balance requirement to set up an offset account, so make sure to check with your lender if you’re eligible for one.
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.
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.
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