What Is an Offset Account and How Do They Work?
6-MINUTE READ
Did you know that your savings can help you to save money on your home loan repayments? You won’t have to place a larger deposit on your home loan to do this, as you can offset your savings against your home loan!
Money in an offset account remains fully accessible to you and is still your money. Yet this money offsets your home loan interest to reduce the amount of interest you pay each month.
Find out more about offset accounts and how they work to save YOU money!
What Is an Offset Account?
An offset account is an everyday transaction account, offsetting the account balance against your home loan interest. You can use an everyday bank account or savings account, depending on your lender.
When you are charged interest on your home loan, the amount is reduced because of the balance in your offset account. Using an offset account could save you money over the loan term.
However, the money in your account balance will always belong to you! You can access the money in the offset account whenever you like, although the interest savings will reduce accordingly.
How Does an Offset Account Work?
An offset account works to save you money on the interest you pay on your home loan. For example, say you owed $500,000 on your home loan. Usually, you would pay interest on the whole $500,000 owed, reducing slightly after each monthly repayment.
If you placed $50,000 savings into an offset account, you would only pay interest on $450,000. This would reduce the amount of interest payable and offer considerable savings!
You can add to your offset account whenever you like and the interest you pay will be adjusted.
Similarly, you can take money out of your offset account if and when you wish. The money is still yours and does not officially reduce your home loan balance.
To use an offset account and receive the maximum benefits, you can ask for your salary to be paid monthly into the account. Interest is calculated daily and so every time your salary is paid, a benefit will be felt.
Is an Offset Account a Good Idea?
An offset account is an excellent idea if you want to pay less interest on your home loan repayments!
Your loan length will decrease if you continue to pay the original repayments even though the interest has been reduced. You receive flexibility in the access you have to the offset account without any restrictions placed on YOUR money.
An offset account will also offer you a tax benefit as the interest benefit is not considered a taxable income. Many investors will choose to use offset accounts due to this benefit!
You should consider any higher fees that are associated with your offset account, however, ensuring that you are making a realised saving. Some offset accounts may require a large deposit to be placed, which may alienate some homeowners with modest savings.
Get a free Australian mortgage assessment today.
How Is Interest Calculated on My Home Loan?
Interest is calculated daily on your home loan and then totalled at the end of each month.
Paying your salary each month into the offset account will provide savings on the days your balance is higher.
Even if your monthly bills reduce the balance substantially, you will still experience a benefit due to daily interest calculations.
Can You Withdraw Money From an Offset Account?
You can withdraw money from an offset account and enjoy unrestricted access. The money placed in the offset account is yours and simply helps to reduce the interest you pay on your home loan.
However, the higher the withdrawals from your offset account, the fewer interest savings you will receive.
Is an Offset Account Different From a Redraw Facility?
There are similarities and differences between an offset account and a redraw facility. Firstly, both an offset account and a redraw facility help to save you money on your home loan repayments.
They are also both connected to home loans and are features that you should look for when searching for lenders with your mortgage broker.
However, an offset account allows you to withdraw money as and when you need it. The money still belongs to you and does not reduce the principal amount of money owed.
A redraw facility concerns paying additional repayments off your home loan, and then being able to redraw the money if you need to.
You will save money on interest, and the extra payments made will reduce the principal amount owed. Although, once you redraw this money, the benefits made are eliminated.
Does an Offset Account Reduce Monthly Repayments?
The monthly repayments required by your home loan will reduce to save you money! You will only pay interest on the home loan amount once the offset account cash has been deducted.
Therefore, if you owe $450,000 and place $80,000 in an offset account, you will pay interest on $370,000. Over time, the amount of money you save each month will total a substantial sum!
Is an Offset Account Better Than a Savings Account?
Offset accounts will save you money on your home loan repayments and so are significantly better than savings accounts!
If you have money in a savings account, you may acquire a small percentage of interest over time. Although, you may be under certain restrictions regarding accessing your money. For example, you may be limited to three withdrawals per year.
Placing this money into an offset account helps you to save money. You will reduce the amount of interest you pay each month on your home loan! That is a real benefit that will pay off every month.
However, offset accounts are usually only granted with certain mortgages. There could be a monthly fee to pay for an offset account which may reduce the savings you make over time.
Are There Different Types of Offset Accounts?
You could acquire a full offset account or a partial offset account. How can each type of offset account save you money?
Full Offset Account
A full offset account is sometimes called a 100% offset account. All of the money placed in this offset account will benefit you and count towards reduced home loan interest payable.
This is the best type of offset account that you could apply for and the best way to maximise your savings!
Partial Offset Account
A partial offset account reduces the interest percentage you pay each month. For example, you may only need to pay 1% in interest rates as opposed to the 3.25% interest agreed in the home loan.
You can save a great deal of money using a partial account, reducing the amount of interest you pay!
You could also find a partial offset account that only takes into account a percentage of the money deposited. Your savings on interest will be reduced, although you will still partially benefit.
Get a free Australian mortgage assessment today.
What are the Benefits of an Offset Account?
How can an offset account provide benefits to you? Here are the top 5 benefits that you could experience when using an offset account.
1. Reduce Interest
Offsetting the amount of money in your offset account against your home loan reduces the payable interest repayments. You could save a significant amount of money over time!
If you increase the money in your offset account, the amount of interest you will need to pay will decrease further! The total money you save is in your hands! Increase the savings in the offset account and save even more money over the loan term!
2. Pay Your Home Loan Faster
Paying less interest due to saving money in an offset account is incredible. But how can that benefit and help you pay off your home loan quicker?
Let’s say you owed $450,000 on your home loan, with an interest rate of 2.09% and a loan term of 30 years. You place $30,000 into your offset account at the initial stage of the home loan and add $200 every month to the balance.
Over the entire loan term, you could save around $44,103 and shave over 2 years off the loan duration.
Although, if you pay additional money into the offset account regularly, you could pay off the home loan even faster! This is dependent on you making zero withdrawals, however.
3. Unrestricted Access
An offset account allows you unrestricted access to your money. You can deposit and withdraw cash from your offset account as and when you wish.
Be that as it may, the best benefits of an offset account are made when you make zero withdrawals.
Consider an offset account to be a long-term savings account, for example for your retirement. Add to the account as you would when you are saving long-term. The savings you make over the years will provide considerable benefits to you and your finances.
At the end of your home loan, you will have substantial savings in the offset account to use as you wish!
4. Tax Benefits
Did you know that the interest benefit enjoyed within an offset account is not considered to be taxable income? You can save further money due to this staggering tax benefit!
5. Types of Account
Depending on your lender, you may be able to offset ISAs, transaction accounts, or savings accounts against your home loan account.
Offsetting an ISA is a particular benefit to your home loan due to the plentiful advantages ISA owners already enjoy.
What are the Disadvantages of an Offset Account?
The disadvantages of an offset account are minimal if you use the account properly. Consider your offset account as a long-term saving account that you consistently aim to add to, making few withdrawals.
If you make regular, substantial withdrawals, the reduced interest will be minimal and you will make scarce savings.
You could have less choice for your home loan as fewer lenders will offer offset accounts. You could be required to pay higher fees and rates to use an offset account, so ensure to balance the costs and savings effectively.
Weigh up the pros and cons of your home loan deal. Would you benefit more from paying your savings into a larger deposit payment? You may experience a lower interest rate overall if you have a larger home loan deposit.
However, some lenders may require a higher deposit to secure a home loan with offset account features.
If you need access to the money saved, an offset account will be better. Once you have paid your money towards a home loan deposit, you will not be able to withdraw the cash again. Of course, you could refinance the loan but that may require additional costs over time.
Can I Get an Offset Account With a Fixed Rate Mortgage?
Offset accounts are available with both fixed interest rate mortgages and variable interest rate mortgages. The difference is the lender as some lenders will not include an offset account facility in their offer.
Overall, a fixed interest rate home loan with an offset account facility would be a great choice to accept. You could achieve a fixed deal for up to ten years, allowing some fantastic savings to be made!
Get a free Australian mortgage assessment today.
Are There Any Further Offset Account Factors to Consider?
Additional offset account factors to think about include making overpayments on your home loan repayments.
If you are saving a sum of money from reduced interest per month, consider still paying this amount as an overpayment. After all, you already budgeted to pay this money when you agreed to the home loan!
You will not pay additional money than your original agreement. But, due to the reduced interest payable, this money will count as an overpayment.
Overpayments will reduce the amount of money you borrowed and result in you paying the home loan even faster!
Will I Be Offered an Offset Account?
Whether you will be offered an offset account varies greatly on your lender as well as your personal circumstances. Let your mortgage broker know you would like an offset account feature at the start of your home loan journey!
The following factors will be considered by a lender when assessing your eligibility for an offset account feature.
- Your credit history
- Your affordability
- The loan to value figure
- The type of property
If you are not currently eligible for an offset account, aim to increase your borrowing capacity for your home loan.
Reduce your debts and credit limits, and try to pay all of your bills and repayments on time! This will improve your credit score and enable a wider range of home loan benefits to be opened up to you.
Contact Odin Mortgage Today!
Your experienced mortgage brokers at Odin Mortgage can find you the best home loan with offset account features! We are experts in Australian mortgages for Expats and Foreign Nationals, whatever your situation!
We will help you get approved for your home loan and compare the latest home loan interest rates and desired features. Our service to you is completely free and you are under no obligation to continue with your home loan enquiry!
Find out more about Odin Mortgage and what a mortgage broker can do for you!
Request a call from Odin Mortgage today for a free, no-obligation discussion and discover your amazing home loan deals! We are Australian Credit Licence holders whose advice you can trust!
Frequently Asked Questions
What is a good credit score for Australian Expats?
A good credit score for Expats in Australia is around the 700 mark. However, the higher the credit score the better!
By paying your bills on time, you can improve to achieve a perfect credit score! The maximum credit score is 1000 for Illion, and 1200 for Equifax.
Do all home loans offer a mortgage offset account?
No, only a few home loans and lenders will offer an offset account. However, your Odin Mortgage broker will find a great offset account feature in your perfect home loan deal!
To maximize your chance of being offered an offset account, you need a great credit score and a desirable borrowing capacity. You should also be prepared to pay a larger deposit, such as 25% or even 30% of the property value.
Will it cost me money to use an offset account in Australia?
Lenders may ask you to pay a monthly or yearly fee to use an offset account in Australia. Due to the costs involved in using an offset account, ensure that you are making sufficient savings to justify its use.
Also, ensure to use the offset account regularly to increase the savings that you make on interest payments. Aim to consistently increase your offset account balance.
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