Offset Accounts Explained
In many cases, loans with offset accounts mean borrowers can save significant amounts of money in repayments over the life of a loan. But an offset doesn’t work for everybody. Find out if an offset is right for you.
What is offset?
An offset account functions almost the same as a regular savings or transaction account. You can withdraw cash, link a credit card and do all the regular things you’d do with a typical savings account. The big difference is that the account is also linked to your home loan, and your loan debt (and therefore your interest payments) is effectively reduced by the amount of money in your offset account.
For instance, if your home loan is $700,000 and you’re paying 6% interest, your repayments on a 25-year loan will be $4,510 per month.
But if you also have $50,000 saved, and your savings are linked to your loan in an offset account, the interest charged is calculated on $650,000. The $50,000 in savings is treated as if it was already paid into your loan. This reduces the interest you need to pay on your loan.
In this case, you’d pay $322 less that month on loan interest. Not bad.
As a bonus, that saving further reduces your loan amount. And that means the loan term will be shorter too.
In this scenario, you could save $149,969 on interest, and the loan term reduces by 2 years and 9 months.
Benefits and drawbacks
There is an annual cost associated with offset loans; usually around $400. These days, offset loan interest rates are usually also slightly higher than the cheapest rate offered by a lender.
A few things change if you have a basic standard variable home loan without an offset account. On the plus side, you will not have to pay the higher annual costs. Many low-rate loans currently do not even require an application fee. As mentioned, the interest rate is typically a little cheaper too.
However, since your savings account balance is not effectively reducing your loan balance, you lose out on the reduced monthly interest charge (and the reduced loan term) you would receive with an offset account.
More offset detail
- Offset accounts are typically only available to people with variable rate loans. If you have fixed your interest rates, you’ll miss out. Some people prefer the certainty of a fixed rate loan. Find out about variable and fixed rates.
- Savings in your linked offset account are available for you to access the same as a regular transaction account. Even though it’s counted towards your loan balance, there’s no extra fees or conditions on withdrawing your money.
- If you have a loan with a redraw feature, you can still access any extra amount you’ve already paid off your loan, no matter if it’s a basic or offset loan. Read more about redraw on a home loan.
- Note that if you’re an investor with an interest-only loan, the actual amount of monthly interest you pay will be less with an offset account. The more cash you have in your offset account, the less interest you’ll pay.
Basic or offset?
Choosing the best loan type depends on how much you can save and the annual fees your lender charges you.
Offset loans are excellent if you have a good income and can consistently maintain a decent balance in your daily bank account. However, this is not the case for a lot of people. Here’s the maths:
Using the above scenario ($700,000 loan; 6% rate; 25-year term), if you have $20,000 in savings and can add $200 a month to that you’ll save more than $120,000 in repayments and knock more than 2 years off the length of your loan. Nice!
Importantly, though, this calculation doesn’t include the annual fees. These are different from lender to lender, but shouldn’t be much more than about $400 or $500 a year. In this scenario, it’s easily worth getting an offset loan.
On the flip-side, if your finances are very tight, it might not work out that well. If you can only maintain $2,000 in your linked savings account, you’ll save around $7,000 over the life of the loan, but pay more than that in fees and charges for the offset. Thanks for nothing.
Talk to an expert mortgage broker
For your variable rate home loan, offset accounts are most likely the best choice if your savings account never dips below $10,000. If it is less than that, it is worth giving us a free, no-obligation call. Your savings history and current financial situation will be assessed by a Mortgage Broker Sydney expert before we help you find the best loan for your unique situation.
In any case, whether it is a plain normal variable home loan or one with the offset feature, we can explain the numbers, track down a great loan and even complete the necessary paperwork to get you into a home quickly, saving you time and trouble.
Our service is always free for you. We never charge our clients. Of course, you’ll still have to pay any lender fees and charges if you do take out a home loan.
Contact Mortgage Broker Sydney today.
Michael began his career in the finance industry over 35 years ago. He progressed through the ranks at the CBA in both retail and corporate lending, culminating in a senior position as a Corporate Relationship Executive. His decision to leave the bank in 2003 to become an independent mortgage broker was driven by his desire to assist everyday customers break through the jargon of the banking world and access the best loan products in the market. His experience is wide-ranging from helping first time buyers to large commercial enterprises. What Michael doesn’t know about home loans, simply isn’t worth knowing!