As well as basic fixed rate home loans there are lenders that offer fixed loans with additional features including facilities to make extra payments, redraw funds and manage offset accounts. An offset account in particular can be useful for reducing the amount of interest paid over the life of your loan. The funds you hold in your offset account are offset against the balance owing on your loan, making such an account a valuable money saving feature.
How do fixed rate home loans with 100 per cent offset accounts work?
Just like a regular bank account, your offset account can be used for paying in your salary and any other income you receive. To access the funds in your account you’ll most likely have a debit card so the offset account functions just like a normal transaction account. The difference with fixed rate home loans with 100 per cent offset accounts, is that when it comes time to calculate the interest on your loan, the money in your offset account is taken into consideration, actively reducing the loan amount on which you have to pay interest.
What are the main features?
With a fixed rate home loan you will have agreed an interest rate with your lender and a fixed term for which this applies. This term can be anything from one to five years, and the amount of time that you fix the loan for will be dependent on your personal financial circumstances.
Once you open your offset transaction account linked to your home loan at 100 per cent you are effectively allowing all the funds contained in your account to offset the loan amount, thereby reducing your interest payments.
When choosing between the available options you should pay attention to fees, fixed terms and any extra features your lender may offer. Both upfront and ongoing fees may apply so be vigilant, and when agreeing terms consider how your financial situation may change before you commit to a lock in for an extended time period.
If your lender offers discounts or redraw facilities, where you can reclaim any overpayments you may have made, consider if these might be advantageous in the future.
What are the risks and rewards?
During the fixed period you will have the security of fixed payments even if interest rates should rise. Your offset account balance will reduce your principal loan amount (as long as it is in credit) and this will actively help you to reduce the amount of interest you pay.
Conversely, if you wish to refinance during the fixed rate period you risk incurring additional costs, which could be expensive and may mean you could lose out if the Reserve Bank of Australia cuts interest rates. Also bear in mind that some offset accounts charge extra fees for the offset facility, so you should always check carefully exactly what you’ll be paying for and whether this is likely to adversely affect any savings.