One of the most competitive aspects of a home loan are the helpful features that it may come with. If your current home loan, or the new mortgages you are comparing, offer offset accounts, it may be worth paying attention, as this handy account could help to save you significantly over the life of your loan.
What is an offset account?
An offset account is a linked transaction account to your home loan, in which any funds you deposit into it work to reduce the interest charged on your monthly repayments.
Unlike a traditional savings account, an offset account will not typically pay interest on the money you deposit. Instead, the money you deposit works to reduce the amount of interest charged on your home loan, and potentially shorten your loan term.You may also gain access to a debit card so you can withdraw the funds in your offset home loan account via an ATM, if needed.
For example, if you have a $500,000 home loan balance, with $50,000 in an offset account, you would be charged interest on your mortgage repayments as if your loan balance was actually $450,000.
An offset account is one type of home loan feature, with others including redraw facilities, the ability to make extra repayments without penalty, and the ability to split your interest rate between variable and fixed interest payments.
In some instances, choosing a home loan with features may cost you more in higher interest repayments and fees. This isn’t always the case with every lender, so it’s worth comparing your options before paying more than you need to for the benefit of an offset account.
9 things you need to know about offset accounts
1. Offset accounts reduce your interest charges
First and foremost, the biggest advantage of an offset account is that the funds you put into it work to offset your interest charges. This is a significant benefit for any homeowner, but especially for investors looking to pay less interest on their investment loan, to earn the greatest return on an investment property (particularly if they are already making interest-only repayments).
In a time of rising interest rates, putting money into your offset account may help to give yourself an ‘interest rate cut’, as you’ll be reducing your interest charges without having to refinance.
For example, using Reduce Home Loans Offset Calculator, we can determine that a hypothetical borrower on a 30-year, $500,000 home loan, paying a rate of 4.50%, that deposits $50,000 into their offset account after five years, may save $88,733 in interest charges.
2. Offset accounts shave time off your home loan
As a deposit account, you can continue to add to the balance of your offset account over the life of the loan. Eventually, you may be able to squirrel away enough money that if you wanted to pay off the loan amount, or make a significant dent in your principal owing, you can via a lump sum extra repayment. In this way, an offset account can be a helpful savings tool that allows you to shave months, even years, off your home loan term.
For example, using the same example above, a borrower with $50,000 in their offset account, could shave 2 years and 11 months off their original 30-year loan term.
3. You can have more than one offset account
As it is a type of bank account, many lenders do not just limit you to the one offset account. You may be able to open multiple offset accounts, and unlimited offset accounts in some instances. Just as you would with multiple bank or savings accounts, this can be beneficial if you’re using the accounts for different savings goals.
For example, if you were saving up for a wedding or home renovations, you may put your cash into a new offset account for each savings goal. You know you will spend this money eventually, but in the meantime, you may feel it better serves you in an offset account, reducing your home loan interest charges, than sitting in a standard savings account.
4. There are different types of offset accounts
There are two types of offset accounts, a partial offset account, and a 100% offset account.
100% offset accounts, or full offset accounts, allow you to use every dollar in the account to offset the interest charged on your home loan repayments. Generally speaking, 100% offset accounts may be more common with variable rate home loans than fixed loan options.
Partial offset accounts, as the name suggests, may only offset a portion of your total offset account balance against your principal owing. This is less common nowadays in Australia, and may be found in rare occasions with some fixed rate home loans.
5. Offset accounts can help you grow your savings
Offset accounts are also a helpful way to store a nest egg of savings, particularly when you’re in a period of rising interest rates on home loans. In some instances, the savings you earn by reducing your mortgage interest charges, could be more significant than interest being paid on a standard savings account.
Prior to the Reserve Bank of Australia-led cash rate hikes of 2022, many homeowners used their offset accounts as a type of savings account, as the rate paid on savings accounts was at record lows. This was because the cash rate was sitting at 0.10% in early 2022. The money a borrower saved by reducing their interest charges was likely more significant than what their bank was paying them on their savings account.
The other side of offset accounts
Now that you have a deeper knowledge of how offset accounts work, and all the benefits that come with them, it’s worth weighing up the downsides as well. This can help you to have a well-rounded understanding of this home loan feature.
6. Can be higher fees and rates
Some lenders may charge you greater fees, like monthly or annual fees, for home loans that come with offset accounts. Some may even charge you a higher interest rate than those offered on basic, no-frills home loans, or expect you to meet more strict LVR minimums. However, some non-bank lenders, such as Reduce Home Loans, offer customers offset accounts for every loan product they offer. This includes our lower-rate and lower-fee home loan options, so you can enjoy competitive pricing and the benefit of this loan feature.
7. Limited to variable rate home loans
In Australia, most home loan lenders limit their offset accounts, and other home loan features, to their variable rate loan products. Oftentimes if you want a fixed rate and an offset account, you may have to opt for a split rate home loan instead.
However, Reduce Home Loans once again bucks this trend and offers offset accounts with all of its fixed rate home loan options. Offset accounts are available to both eligible owner-occupiers and investors seeking a fixed interest rate.
8. Will need a substantial balance
If your savings balance falls under the $10,000 mark, an offset account may not work as hard for you as you’d like. For offset accounts to be worth the additional costs mentioned above, you realistically will need to have the income and financial discipline to save a significant amount in your account.
For example, if your 30-year home loan balance is $900,000 (paying a rate of 4.5%) and you deposit $15,000 into your offset account after five years, you’ll only shave seven months off your loan term. You’ll reduce your interest charges by $30,339 – which is no small sum – but this is not as substantial as if you were able to save a larger deposit in your offset account. Comparatively, with $75,000 in this same offset account, you would shave 2 years and 6 months off the home loan, and save $136,493 in interest charges.
If you are a first home buyer that has just spent the majority of your life’s savings to get a foot on the property ladder, it may take some time for your offset account to be as helpful as your regular savings account.
9. Need good savings behaviour
While the money you keep in your offset account is yours to use as you wish, it’s worth keeping in mind that a habit of making withdrawals into your offset account will reduce the money and time you may otherwise have saved. To gain the full benefits of an offset account, you will need to exercise self-control over an extended period of time. If this sounds familiar, you may be better off keeping your nest egg in a savings account that does not penalise you for dipping into your funds.
For more information about Reduce Home Loans’ competitive home loans with offset accounts, or to speak to an expert for more information, please don’t hesitate to get in touch today.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.