If you’re on the hunt for your first home loan, or you’re considering refinancing in 2022, you may be looking to add helpful features to your mortgage.
There are several home loan features popular amongst Australian homeowners, including the ability to make extra repayments, a redraw facility or an offset account.
But when it comes to managing your household budget and reducing your mortgage interest repayments, an offset account may be worth considering for 2022. Using your income and any extra savings you bring in, an offset account may be able to help you reduce the interest you pay on your mortgage.
This has been the story for millions of Australians, with the latest Australian Prudential Regulation Authority (APRA) figures, released to The Australian, reporting that mortgage holders have around $100,000 sitting in their offset accounts on average.
The recent APRA research also found that mortgage holders are now 45 months ahead on their repayments on average. This was an increase from 32 months recorded in March 2020 (pre-pandemic). There is now $222 billion sitting in offset accounts across the nation, as of the end of September 2021, up from $174 billion in March 2020.
So, let’s explore exactly what an offset account is and how it may benefit you as we move into 2022. After all, who doesn’t want to pay less interest on their mortgage?
How does an offset account work?
An offset account is a linked transaction account connected to your mortgage. Any payments you make into this account ‘offsets’, or helps to reduce, the amount of interest charged on the total loan amount.
Say a homeowner has a $400,000 mortgage with $30,000 in their offset account. This means they would only pay interest on $370,000, as the additional $30,000 in their account decreases the home loan interest payable on this total home loan balance.
Using an offset account for $400k home loan
|Current monthly repayments||$1,580|
|Savings in interest||$24,096|
|Savings in time||1 year, 3 months|
|Updated loan term||28 years, 9 months|
Source: Reduce Home Loans Offset Calculator.
Note: Based on a hypothetical 30-year, $400,000 home loan at 2.5%. Assumes one off payment of $30,000 five years into a home loan. Does not factor in fees or interest fluctuations.
And because the offset account is like an everyday bank account, this $30,000 is accessible to the homeowner at any time, with an unlimited ability to withdraw funds without limitation. This is one of the biggest advantages of this home loan feature compared to a redraw facility, as there may be limitations on the amount you can withdraw with a redraw facility.
Any withdrawals you do make, however, will then decrease the amount you’re saving in interest repayments. So, the total benefit you may gain from an offset account will depend on the amount of money you can deposit into the account and your interest rate.
Considering that a number of economists have predicted that the Reserve Bank of Australia’s cash rate will rise earlier than Governor Philip Lowe’s prediction of 2024, prioritising reducing your interest repayments may be worthwhile. The impact that a future rate rise could have on your household budget may be lessened if there are already funds in this account, depending on your financial situation.
How to boost your offset account funds
Our current booming offset account balances have a lot to do with the current low interest rate environment, coupled with increased savings from minimal spending due to COVID-19 restrictions. The money homeowners would otherwise put towards travel and entertainment, for example, may have been diverted into the humble offset account.
In an interview with news.com.au, Market Economics managing director Stephen Koukoulas noted that homeowners who took out a mortgage as recently as five years ago are set to benefit from their offset accounts.
“It could be the difference between having a 30-year loan or a 20-year loan. You’ve still got to pay it [the mortgage] off, but you’ve probably knocked off a good six or seven years,” he said.
“If you took out a loan 10 or more years ago the effect is probably even bigger,” said Mr Koukoulas.
So, if you’re new to the offset game, how can you get on top of potentially rising interest rates and protect your household budget now?
It may be worth considering redirecting your sources of income and any windfalls (such as your salary, tax returns, bonuses etc.) into your offset account from day one. The longer these funds sit in the offset account, the greater savings in interest charges you may find.
Further, consider setting up a direct deposit into your offset account from your main transaction account to ensure you’re regularly growing the balance. For example, if the money you’d otherwise have spent on a family holiday is just sitting in your savings account waiting for restrictions to ease, it may be worth transferring it into your offset.
The smallest of regular savings can make a serious difference over a 30-year loan, with even $50 a week adding up.
What else should you consider about an offset account?
An offset account may be a helpful loan feature for some borrowers, but it’s worth keeping in mind that a lender may charge you a higher interest rate for the benefit of using one. If finding a rock-bottom interest rate is a priority to you, a more simple, no-frills home loan may be worth considering.
It’s also worth keeping in mind that offset accounts are typically reserved for variable rate home loans. However, unlike other financial institutions, Reduce Home Loans offers the flexibility of an offset account for its fixed rate home loan customers (both owner-occupiers and investors), making it a stand-out in the market.
Reduce Home Loans also offers almost all its variable home loan customers an offset account. When paired with one of our record-breaking low interest rates, an offset account offered by Reduce Home Loans may help you save significantly over the life of your loan.
If you’re interested in learning more about Reduce Home Loans mortgages with offset accounts, please view our home loans here. If you want to speak to an expert for more specialised advice, please don’t hesitate to call us on 1300 733 823.
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