A mortgage offset account is one of the most valuable home loan features available, and when used appropriately, it may significantly reduce the amount you pay overall and in monthly repayments.
To help you decide if an offset account is best for you, we’ve answered some of the most common mortgage offset account FAQs:
Does an offset account reduce your principal?
Yes, the primary objective of an offset account is to reduce the principle owing on your house loan. An offset account is a type of transaction account that the lender has linked to your mortgage, and any funds entered into it are applied to your mortgage principle.
Assume you owe $400,000 on your mortgage and put $50,000 in your offset account. In a 100 percent offset account (more on this later), this means you’ll only be paid interest on the $350,000, decreasing the time and overall cost of the loan by charging you interest on a smaller amount. The more money you keep in an offset account, the less interest you’ll pay on the loan.
How much does an offset account save?
A smart mortgage offset account can save you thousands, if not tens of thousands, of dollars in interest over the life of your loan. Using the $400,000 loan with $50,000 in a linked offset account as an example.
On a loan with a 3.00 percent annual interest rate, a 25-year term, monthly repayments, and no money in the offset account for the first two years, you would cut your loan term by about 4 years and save nearly $44,000 in interest. That’s also just by making a one-time payment to the offset account; by making recurring contributions, such as by tying your paycheck to the offset account, you may earn a lot more.
Calculate how much you could save using our Homestar home loan offset calculator.
Do you earn interest on an offset account?
In a technical sense, an offset account does not pay interest. Instead, it prevents you from paying extra interest on a home loan. An interest-bearing account is similar to a savings account in that it calculates interest based on the amount in your account up to a certain limit; it usually has much lower rates on average than home loan rates; and it requires you to pay tax on any interest earned because it is considered income.
While you may only receive a small amount of interest in a savings account, the money works considerably harder in an offset facility, saving you thousands of dollars rather than earning a moderate amount of interest as you would in a bank.
What is a partial offset account?
So far, we’ve used the example of a 100 percent offset account, in which the whole balance of the account is applied to the home loan. A partial offset account, on the other hand, simply lowers your interest rate by a portion of the amount in your offset account. For example, putting $50,000 in a 50 percent partial offset account would save the loan $25,000 in interest.
As a result, partial offset accounts are less common and, in general, less successful in assisting you in repaying your mortgage. If possible, look for a mortgage with a 100 percent offset account.
What is the difference between an offset account and a redraw facility?
Offset accounts and redraw facilities are comparable in certain ways and are frequently combined, but there are a few major differences. Redraw options are often only available on variable rate house loans; with a redraw facility, you can make additional repayments to your home loan and redraw them if necessary. For example, instead of taking out a new loan, you could withdraw $50,000 from your home loan to pay for a major repair.
A redraw facility’s flexibility varies depending on the lender. Some lenders will allow you to redraw money immediately online, while others will require you to fill out an application. You may also be charged a price for each withdrawal, although some home loans allow you to make “unlimited fee-free redraws” at any time.
What interest rates do offset account loans charge?
Although it isn’t always the case, house loans with offset accounts are more likely to have slightly higher interest rates and/or fees. That’s why it’s critical to analyse your home loan options and select one with a low interest rate and minimal costs.
What kind of lenders provide offset accounts?
Offset accounts are a common product, and almost every mortgage lender in the country, from the big four banks to tiny mutual banks, offers at least one offset house loan.
However, not all of them are created equal, and many of these lenders may provide offset accounts that come with fees, higher interest rates, fewer redraws, or lengthy application processes.
Talk to a Homestar financing specialist immediately to get started on your application so you can get the most out of your home loan offset and save thousands on interest charges.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.