When it comes to selecting a home loan, it’s important to understand that there are certain product features that can help you save money and shave time off the life of your loan. A mortgage offset account can be a powerful tool to help you get ahead of your repayments by reducing the amount of interest payable on your loan.
A mortgage offset account is a type of transaction account that is linked to your home loan. This account allows you to “offset” the balance of your account against your home loan’s balance when interest is calculated. This ultimately reduces the interest you pay on your home loan over the length of your mortgage, meaning you can pay off your home loan sooner.
Offset accounts work similarly to any transaction account while also acting as a financial buffer because it helps you to save on the interest applied to your home loan balance (so long as you have money in your offset account).
As an example, let’s say you have a home loan with a balance of $400,000, and you have $20,000 in your linked 100% offset account. The lender will offset the $20,000 balance you have in your offset account against your home loan’s balance and, as interest is calculated daily, will only charge you interest on $380,000 for the day, despite your actual home loan balance being $400,000.
Effectively, the lender will calculate the daily interest on the difference between your mortgage offset account and the balance on the home loan (if you have a full 100% offset account that is).
You will not earn interest on your savings held in the offset account, as the balance is offsetting the interest charged on your home loan. Your offset account funds won’t grow unless you continue to make deposits into that account.
Of course, the money held in your offset account is still fully available to you. However, should you withdraw it, it will reduce the balance that will be “offset” against your home loan balance.
The key to making a mortgage offset account work is to maintain enough of a balance so that it is worth it to you, as you may be charged a higher interest rate or have higher fees attached to your home loan, compared to a home loan that doesn’t offer an option of having an offset account.
There are two types of offset accounts available:
An offset account can save you money on interest charges, which can ultimately help you pay off your home loan faster, as interest charges are reduced but the minimum repayment amount remains the same. It helps to maintain a strong balance, however, even small irregular deposits over the course of the mortgage can make a big difference.
Another factor is that a mortgage offset account is also a transaction account, meaning you can use it like an everyday account; withdrawing your money at any time – just remember that the more money you withdraw, the less your mortgage balance will be offset, conversely, the larger your balance the bigger the offset and the greater the benefit.
If interest rates increase, you might find that your lender changes the interest rate on your variable rate home loan. However, even if rates go up, interest is only ever applied to the amount owing on your home loan minus the balance of your offset account.
So, while you stand to be charged interest at a higher rate, you do have the option to move savings into your offset account to reduce the total interest payable on the net home loan amount.
Offset accounts can be used like any ordinary savings or transaction account so you can even have your salary deposited into it which will help to increase the amount you’re offsetting against your home loan, given interest is calculated on a daily basis. You can even set up direct debits for any regular bills or payments you need to make, as well as have a debit card attached to assist with everyday purchases. Offset accounts can also offer peace of mind by having readily accessible funds for any emergency you may encounter.
A redraw facility is attached to your mortgage account and allows you to withdraw money when you’ve paid extra money towards your home loan. So, if you’ve paid an extra $20,000 off the loan, your lender may allow you to withdraw up to that amount or up to the current loan limit, which they will add back to the principal amount owing.
When it comes to money availability, offset accounts are like any typical transaction account, as the balance is available for you to use or move anytime. When trying to withdraw money through a redraw facility, you might need to apply and possibly wait a day or two to access your funds. Refer to your provider’s terms and conditions to understand how your redraw facility works (if applicable).
Making additional payments into your home loan can be beneficial for some borrowers as it will help you pay off your loan faster and reduce the interest you pay over the life of the loan. Of course, this is only beneficial if you don’t continuously redraw those extra funds.
Furthermore, redraw facilities only allow access to extra repayments you have made on your home loan, up to the current loan limit, whereas you can immediately access all the funds in your offset account.
When it comes to account-keeping fees, offset accounts typically have low or no fees and some have transaction fees; whereas there could be a mandatory redraw fee when withdrawing money from your home loan account.
All that being said, an offset account only allows you to withdraw money you have to hand right now. A redraw facility gives you access to additional money you have previously paid into your home loan. Both can be useful; it’s up to you to decide whether they’re suitable features for you.
You may want to keep the following in mind when it comes to choosing an offset account:
Different banks and lenders may require that you have a certain amount of money (for example, $1,000) in your offset account before they start offsetting this against the balance of your home loan.
You’re taxed on your earnings and income, but the benefit of reducing interest on your home loan with a mortgage offset account is not income – it’s just saving you money. The money you deposit into your offset account will have already been taxed, but it isn’t taxed once it is in the account, unlike interest earnings on saving accounts.
You can generally get a debit card connected to your offset account, as the offset account essentially acts like a transaction account. Having a debit card makes it easy to access cash held in your offset account when you need it.
Only you can really decide, however when placing money into your offset account, your lender offsets this against your home loan balance, thereby reducing interest which is calculated on your loan on a daily basis. Everyday savings accounts don’t offer you that same advantage.
Furthermore, the interest you earn from a savings account is considered taxable income, and therefore must be declared to the ATO with appropriate tax paid on it. The interest you save by reducing your net home loan balance isn’t taxable as it isn’t earnings – only savings.
Given that home loans currently have higher interest rates than savings accounts, money in a mortgage offset account ‘works harder’ than funds stored in a savings account.
Of course, money sitting in a mortgage offset account will not grow unless you deposit more funds into it, as it does not attract or get paid interest. Savings accounts help grow your wealth as they attract cumulative interest, so deciding between them is up to you and may depend on what your primary goal is; paying off your home loan faster or building up additional savings?
Determining whether an offset account or additional repayments is the better option can be tricky. They both act in a very similar way in that they both reduce the amount of interest you pay. A key difference is that making extra repayments can help pay off your principal and interest (if you’re on a principal and interest loan), while a mortgage offset account only reduces the interest that you’re charged.
You may be able to make additional repayments on a home loan and have a mortgage offset account. You’ll need to weigh up the pros and cons of both. We’ve outlined a couple here.
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To get your salary deposited straight into your offset account, you’ll need to get in touch with your employer or payroll office to provide them with your offset account banking details. Your bank or lender can supply you with the specific account details you’ll need to give to your employer.
While rarer than variable-rate mortgages with offset accounts, there are some lenders that do offer a fixed rate home loan with an offset account.
No, offset accounts don’t actually earn interest on the money you deposit, but they do help you to save money by reducing the amount of interest you have to pay on your home loan.
Most lenders will allow you to open multiple offset accounts, whether for multiple home loans or for a single loan. You might want to consider this if you’re having your salary deposited into your offset account and then wanting to divvy the money up to account for different purchases (e.g. one account for the car, another one for bills, etc.).
It is up to you to consider your own personal circumstances and to decide whether an offset account is worth it or not for you. That’s why prior research and comparing options is vital (and we know a thing or two about comparing)!
