An offset account allows you to save thousands and shave years from your mortgage. Find out how shrewd Australians use them.
Attaching an offset account to your home loan is the accountant-inspired feature to make a portion of your interest payments disappear. If you want to pay off your mortgage sooner, a home loan with an offset facility can be a considerable option to reduce the interest payable against your outstanding loan balance and reducing down your overall debt levels. Learn more about how offset accounts work and when appropriate, compare home loans with 100% offset accounts.
How does an offset account work?
An offset account is a transaction account attached to a home loan. The balance of a 100% offset account is taken away from the principal remaining on the loan for interest calculation.
Here is a breakdown of how a 100% offset account works:
In this situation, interest is applied to $130,000 instead of the full $150,000 owed. As savings grow, the amount saved on interest also grows. Effectively, this reduces the amount of interest charged over the life of the loan.
Do my repayments get smaller with an offset account?
No, your repayments will stay the same with an offset account.
What will change is the proportion of the amount of your repayment which goes towards the loan amount, and the amount that goes towards interest.
Because the offset account lowers the interest due on your loan, more of your repayment goes towards the actual loan amount, known as the 'principal'.
How to use an offset account as a buffer
An offset account can be used to build a buffer of repayments and help pay a loan off even earlier.
Borrowers who do this will take out a regular 30 year loan and then pay it off like a 20 or 25 year loan.
To do this, a borrower would pay the the minimum repayments as usual, and then pay any extra amounts into the offset account. This gives them access to the funds in the event that they need the money, and gives them the extra wiggle room of lower repayments in the event that they have income issues or rates rise and they must stop making extra payments.
To find out what repayments would be on a 20 or 25 year loan, use our loan repayment calculator.
Is an offset account available through a trust?
Yes, some lenders do offer offset accounts on trust home loans. The policies surrounding this will differ depending on the lender, so be sure to raise this with your lender or broker first.
What is an offset account?
Video interview with Carla Baldock, Neil Manuel & Heidi Armstrong
Click here for video transcript:
Carla Baldock: An offset account is an account that is linked to your mortgage, and the balance of that offset account directly reduces the balance of your mortgage, therefore reducing the interest that you pay on your home loan.
Neil Manuel: What an offset account is, is a savings account that is taken up when you take out your home loan, and the savings account allows you to put your wages in it, any salary, any extra money that you get into the savings account. You don't actually need to apply that money into the actual home loan. Just by it being in your savings account, the offset savings account, it actually allows the interest that gets charged on the actual home loan to be reduced based on how much money you have held in that savings account.
Heidi Armstrong: An offset account really works as a separate account that sits alongside the loan account. A really important distinction is it doesn't form part of the loan account. And so what's so important about it? Well, the first thing is it's great. It works very much like a transactional account where you can pay your salary into the offset account, and you can pay your bills from the offset account. But the real benefit is that any money that you have in that offset account, not only is it working to reduce the interest that you would otherwise pay on your loan, but what it does is it doesn't reduce the overall balance of the loan. And that's important if you're particularly structuring your loan in a way to maximise tax effectiveness.
Why should I consider an offset account?
An offset account may save you interest and cut the length of a home loan. It will work best for people who can maintain a decent balance in their offset account and contribute further to it over time. It is worth shopping around, as offset accounts can differ in inclusions and fees.
Will a home loan with an offset account cost me more than a standard home loan?
Traditionally, home loans with offset accounts would either attract a higher interest rate or higher fees and sometimes both. However, with the emergence of smaller online lenders, many loans are feature-packed with market leading rates. Major lenders still tend to charge a premium for offset accounts, so it is worth shopping around.
Are there different types of offset accounts?
Yes, there are 100% offset accounts and partial offset accounts:
- 100% offset accounts are the most common form. As explained in the above table, the balance of the offset account is deducted from the outstanding principal before interest is calculated. The balance of this offset account doesn't earn interest.
- Partial offset accounts can be explained as an online savings account where the interest which would be generated by the balance pays off the principal of the loan, without the borrower having to pay tax on the interest. A 100% offset account can be a far more effective tool for reducing the interest paid on a loan.
How much interest can I save by using an offset account?
Below is a loan scenario comparing the same loan without and with a 100% offset account.
From this example, taking the loan with an offset account saves a whopping $136,000 over the life of the loan. It also reduces the term of the loan from 25 years to 19 years and 8 months. Owning a home outright, debt free, is a goal that is well worth fast-tracking. Especially as first time buyers are waiting longer to plunge into the property market.
Should I use an offset account or invest in an online savings account?
People ask me, 'if I invest my cash in an online savings account and use the interest to pay off my mortgage, does that save me more loan interest than an offset account?' If the purpose is to payoff home loan debt, no is my answer. Online savings accounts earn less in interest than lenders charge in interest for home loans. And, with a savings account, tax will be paid on the interest earned.
What fees do I need to be aware of?
Some offset accounts charge fees on standard transactions. It is well worth putting the research in as to whether the home loan you're applying for has a dud transaction account.
Compare variable rate 100% offset account home loans
Offset accounts could potentially save you thousands in mortgage repayments over the life of your home loan.
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As outlined in our example scenario, harnessing an offset account like your accountant does could save you $136,000 in interest and earn you 5 years and four months of debt-free home ownership.