Today we are looking at all things offset accounts

What is an offset account

An offset account is a transaction account that’s linked to your home loan. You can deposit or withdraw money from this account just like a regular transaction account.

The key difference is that any money held in your offset account can help reduce the amount of interest charged on your home loan. The higher your balance and the longer the period that the money is held in the offset account, the less interest you’ll pay. This could help you pay off your loan faster.

It’s worth noting that the offset feature is typically only available on variable rate home loans, though some lenders do offer it on selected fixed rate home loans (but that would be the exception to the rule).

How does it work?

Here’s an example of how an offset account works.
– Let’s say you have a $600,000 home loan
– You then deposit $55,000 into your offset account.
– You’ll only be charged interest on $545,000, rather than the full $600,000,
– The savings will occur for as long as the $55,000 stays in your offset account.

How much can I save?

Over time, the interest savings could potentially amount to thousands of dollars and cut years off your home loan term.

Expanding upon the earlier example, lets see how much you could save:

– You have a $600,000 home loan facility
– The interest rate is 5.75%
– The initial loan period is 30 years
– You keep $55,000 in your offset account for the life of the loan
– You save over $202,209 in interest over the life of the loan
– You reduce the time it takes to pay off your home loan by 4 years and 9 months!

How do I even use an offset Account?

Think of an offset account as a standard everyday transaction banking account. You simply deposit money into this account, and the bank will factor in the daily offset account balance into the interest payable calculations for your loan repayments.

Many people will have their salaries paid directly into the offset account, and pay for everyday items like groceries & bills from this account.

Offset account vs normal savings account?

Your money generally works harder in an offset account compared to a regular savings account.  That’s because the interest rate you pay on a home loan is generally higher than the interest you earn in a savings account.

Another advantage is the interest you save by using an offset account won’t be considered income – which means it won’t be taxed. On the other hand, the interest you earn on a savings account will generally be considered income – and that means it may be taxed.

To Offset, or not to Offset – that is the question

The argument for an offset is definitely compelling, but before deciding on what will be best for you, make sure you consider all aspects.

Offset accounts typically attract a monthly or annual fee; so be sure to weigh up the cost versus the potential savings before you proceed. For many Australian’s they could stand to benefit significantly from not only holding an offset account, but using it correctly.

What’s the difference between offset and redraw?

Redraw facilities work in a similar way to offset accounts, in that the fundamental concept and idea is about saving you interest payable on your home loan.

And whilst similar, there are key differences. Generally speaking, redraw facilities are less flexible, they can mess around with Investment Tax Deductibility – of course that’s in reference to an investment property; but its something that many people don’t consider about their current Owner Occupied home loan, as that may one day turn into an investment property for you.

And like anything in the Home Loan Space, for every question you answer, it usually raises even more topics to cover off on,

And that’s why we created the Lending Edge, a centralised location for you to learn about all things home loans.

So if you haven’t done so already, check out our articles explaining how redraw facilities work, or even the article where we compare the differences between offsets accounts and redraw facilities in greater detail.

Keegan Rezek
Mortgage Broker & Director

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