Want to reduce your home loan interest payments? Are you looking for ways to pay down your home loan faster, while holding control of your savings and accessing them as you wish?
An offset account linked to your home loan may be right for you.
Read our comprehensive guide to offset accounts, including how they work and benefits, the function of multiple offset accounts, how they differ from a regular savings account and helpful tips.
What is an Offset Account?
Offset accounts are transaction accounts linked to home loans. The money held in this account is ‘offset’ against the balance in your home loan; meaning you pay interest on your loan, less the amount in your linked offset account.
- A offset account which allows you to offset your home loan principal by the full amount of money in the offset account
The funds in your offset are accessible when you need them. You can use your offset account as an everyday transaction account or dedicate it to savings only. Interest is calculated daily; so the more money you have in your offset account, the more you will save on interest.
How Do Offset Accounts Work?
Offset accounts are typically a feature only available with variable rate home loans.
Here’s how they work:
You have a home loan of $750,000 and $60,000 in your offset account.
Your interest is calculated on your total home loan balance, less the amount in the offset, meaning in this case your interest would be calculated on $690,000. Your repayment remains the same, but a bigger chunk of it goes towards paying down the principal of your loan, rather than towards interest.
Funds within your offset account are readily accessible and you can use them how you wish. It can function as an everyday transaction account for general spending, budgeting or be dedicated solely towards saving money.
Important considerations:
- The benefits of an offset account may be lost if you have a consistently low balance in your account.
- Some people may find that having their savings readily accessible results in more impulse spending
- Some banks will attach fees to offset accounts, though lenders like Homestar Finance do not charge such fees.
Tips for Managing Offset Accounts
Review Balance Regularly to ensure maximum interest savings
Automate Savings and Payments by having your salary paid into the offset account and schedule any transfers between accounts to align with savings goals and ensure enough funds or available for bills
Maintain a Minimum Balance to cover fees and avoid paying interest in excess; remember, interest on your home loan balance is calculated daily. The more money you hold in your offset, the more you can save on interest
Allocate Accounts for Budgeting and Specific Purposes if using multiple offset accounts; you could use one as a regular transaction account linked to your home loan and another for bills and expenses and another for savings to help you budget effectively
Benefits of Offset Accounts
Reduced Interest Payments
The more you offset, the less interest you pay, giving you the opportunity to save thousands over the life of your loan.
Faster Loan Repayment
By reducing interest costs, you can direct more of your regular repayments towards the principle of your loan, shortening the loan term.
Flexibility and Accessibility
Funds in your offset account can be accessed as you wish; whether it’s for everyday spending, emergencies or investments. Money in your offset is usually available instantly, unlike accounts with a redraw facility which could take several business days to access.
Tax Efficiency
Interest savings in your offset account are not considered taxable income, unlike the taxable interest earned in a savings account.
Offset Vs Savings Account?
General savings accounts and offset accounts both allow you to access your money easily and use it for everyday spending, though they can serve different purposes.
A savings account is specifically designed for saving money and earning interest on the deposited funds. These accounts are not tied to a mortgage and are accessible to anyone looking to save money.
For those with a mortgage, the major differences are:
- Your offset account balance reduces the amount of interest you pay on your home loan, whereas money in your savings account does not, and
- Interest earned from a savings account is considered taxable income, whereas interest saved by having an offset account is tax-free.
Is There a Maximum Amount You Can Hold in an Offset Account?
There is no limit on the amount of money you can hold in an offset account linked to a variable home loan. If a lender offers an offset account linked to a fixed rate mortgage, a maximum threshold amount held in the offset account over a set period may apply.
Check with your lender whether they impose a cap on offset account balances linked to their fixed rate home loans.
Note:
The purpose of your offset account is to reduce interest on your home loan. If your balance exceeds your loan, you will earn no additional benefit from excess funds, as you cannot offset more than the loan itself.
Lenders will have different fees attached to their offset account products. If maintaining a high balance in your offset account leads to higher management fees, or if the loan itself comes with a higher interest rate due to the offset feature, you should weigh these costs against any potential savings.
For example, if you have a home loan of $600,000 and $625,000 in your offset account, you will earn no additional benefits from that $25,000 surplus.
Can Interest Only Loans Have an Offset Account?
Yes; offset accounts can be linked to interest only loans.
By keeping funds in an offset account, you can benefit from reduced interest expenses while enjoying lower monthly repayments during the interest only period. This may also allow you to leverage additional funds for other investment opportunities or financial goals.
Key considerations:
The interest only period is limited to between 1-5 years. When the loan switches to principal and interest, repayments can increase significantly, potentially impacting your cash flow.
Most importantly, during the interest only period, the principal of your loan will not be paid down. This could potentially lead to prolonged debt and increased total interests costs over the life of your loan.
Can Your Mortgage Have Multiple Offset Accounts?
Yes; some lenders will provide you with the option to have multiple offset accounts linked to your home loan.
Having multiple offset accounts can allow for greater control of your budgeting, spending and goal tracking, while still allowing for cash flow that has minimal impact on your interest savings.
The combined balances of all of your offset accounts count towards the reduction in interest charged on your home loan, which has the potential to significantly reduce the overall cost of the loan.
Example:
Let’s say you have a $700,000 home loan and three offset accounts with the following balances:
- Offset account 1: $10,000
- Offset account 2: $20,000
- Offset account 3: $25,000
Total offset balance = $10,000 + $20,000 + $25,000 = $55,000
In this example, the interest is calculated on $645,000 instead of the full amount of $700,000.
Always do a cost-benefit analysis to determine whether the management fees associated of having multiple offsets outweighs the benefits. Finding a lender that does not charge offset account fees, such as Homestar Finance, will help you to avoid such pitfalls. Some lenders won’t offer multiple offset accounts, so check before you sign. Additionally, lenders may have varying terms attached to how the offset accounts are structured and used.
Summary
An offset account is a transaction account linked to a home loan. Money held in the account is ‘offset’ against the balance of your home loan, reducing the amount of interest you pay. An offset account can help you save thousands and potentially shorten the life of your loan.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information and if necessary, seek appropriate professional advice.
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