Offset Account

An offset account can be a great way to help you reduce interest and pay off your home loan faster. Contact our friendly mortgage brokers for more information.

What is an offset account?

An offset account is a transactional account that is linked to your home loan. As with a regular transactional account, you are able to make deposits and withdrawals. You can also make regular transactions through ATMs, EFTPOS, or debit cards.

However, unlike a regular transactional account, the funds in your offset account can help reduce the interest you pay on your home loan and can help you pay off your home loan sooner.

Offset accounts are usually linked to variable rate home loans, but may also be linked to selected fixed rate home loans. Your lender will usually contact you to set up your offset account upon or soon after the settlement date.

How does an offset account work?

When a lender calculates the interest charged to your home loan, the balance of the offset account is offset against the remaining balance owing on your home loan.

For example, assume your current loan balance is $200,000, and you have $20,000 in your offset account. Your lender will charge you interest on $180,000 as opposed to the full $200,000.

You will continue to reduce the interest charged to your home loan providing you maintain the balance of your offset account.

An online offset calculator, like the one below, can provide you with an example of what an offset account could do for you.

Does an offset account reduce repayments?

An offset account can save you money and help you pay off your home loan sooner by reducing the amount of interest you pay over the life of your loan. However, it will not reduce your weekly, fortnightly, or monthly repayments. Instead, it will allow a greater percentage of your repayments to go towards paying off the principal portion of your loan, rather than the interest portion.

It can be difficult to gauge whether an offset account will be truly beneficial for your individual situation. But experts, like our mortgage brokers at Oceania Finance, are here to help. With access to a wide range of lenders and extensive experience in negotiating terms, our mortgage brokers can ensure you get the right home loan package for you.

Contact us today to explore your options with experts who care!

How to use an offset account?

Many people use offset accounts in the same way they would a regular everyday account. However, it’s important to know how to use an offset account as effectively as possible so you can get the maximum benefit. Steps you can take to get the most out of your offset account include:

Deposit all your income into your offset account

Having your salary or wages deposited directly into your offset account can ensure that every cent you earn is working towards reducing the interest charged on your home loan. Home loan interest is counted daily, so every day there are funds in your offset account will help to reduce your home loan interest.

Maintain the balance of your offset account

Your offset account will continue to help reduce the interest charged on your home loan so long as there are funds in the account. So it’s important to ensure that you continue to maintain the balance of your offset account.

Consolidate other savings accounts into your offset account

If you have separate savings accounts for expenses like bills, travel, or household expenses, consider transferring these funds into your offset account. The more funds you have in your offset account the more you will save in home loan interest.

Do not exceed the balance of your home loan

While there is no limit to the amount of funds an offset account can hold, it is not beneficial to have more than your home loan amount in the account. This is because offset accounts do not earn interest and lenders will typically only offset funds up to your home loan amount.

For example, if your loan balance is $200,000, but you have $250,000 in your offset account, your lender will usually only offset up to $200,000. The extra $50,000 will not be taken into account and it does not earn interest.

Offset account disadvantages

While offset accounts can help some people save both money and time on their home loans, there are some disadvantages to look out for.

• Higher interest rates – offset accounts are usually linked to variable rate home loans with higher interest rates.
• Additional fees – offset accounts can come with additional fees so it’s important to read through any terms and conditions carefully.
• You need savings to make it worthwhile – an offset account is only effective if there are funds in the account. So if you don’t have any savings or you know you will struggle to save, you might find that an offset account is not the best option for you.

Offset account vs savings account: Is it better to have money in savings or offset?

Generally, if you’re a homeowner, your money will work harder for you in an offset account than it would in a savings account. This is because the interest charged to your home loan is usually more than the interest your regular savings account would earn. However, it’s important to remember that offset accounts can come with additional fees and are usually attached to variable rate home loans with higher interest rates.

Are offset accounts worth it?

Ultimately, whether or not an offset account is worth it will depend on your individual circumstances. When deciding if an offset account is right for you, consider;

• Will you be able to save money in the offset account?
• Are there additional fees or costs associated with the offset account that will negate any interest you may save on your home loan?
• Are the interest rates reasonable with repayments you can afford?
• Would other benefits, such as a redraw facility, be more suitable than an offset account?

Speaking with a mortgage broker, like our experts at Oceania Finance, can help you work out whether an offset account is worth it for you. Our friendly team will provide a full, comprehensive service so we can help you reach your financial goals.

Contact us today for friendly service and a personalised approach.