What is an offset account?
An offset account is essentially a transaction account linked to your home loan where the account’s balance ‘offsets’ the outstanding home loan debt, so you'll only be charged interest on the difference.
For example, say you had a loan of $610,000 and had $60,000 in a linked offset account, you would only be required to pay interest on the balance of $550,000.
As the balance in this offset account grows, the amount you save on interest also grows, which could save you money and cut the amount of time it takes you to pay off your loan.
To see just how much you could potentially save on interest costs with an offset account, check out Savings.com.au’s Mortgage Offset Repayment Calculator.
Fixed, variable rates and offset accounts
An offset account can be utilised across both fixed and variable-rate loans, generally at 100%. However, some lenders may cap the amount you can have in an offset account, have partial offsets (e.g. only 50% or 80% of the account balance offsetting the principal) or even limit offset accounts to packaged home loans. It therefore pays to do some groundwork by researching the market before you dive straight in.
Like a regular transaction account, your money is still accessible in the offset account. Although, if you were to make a withdrawal, you’ll have less money working to lower the interest charged on your home loan.
What are the potential disadvantages of an offset account?
There are some offset account disadvantages to be aware of. Mainly, home loans with offset accounts can have higher interest rates and fees than loans that don’t have them (more info on this in the next section).
Also, some offset accounts only partially offset the interest costs on funds in the account. For example, $50,000 in a 50% partial offset account would only offset the interest costs on $25,000 of the outstanding loan balance.
Maximising your offset account
To reap the benefits of an offset account and accumulate the most savings, the amount of money deposited into the account must be consistently at a reasonable level - $100 isn’t going to cut it for you!
One of the ways that people manage to maximise the amount in their offset accounts is by putting all of their income into their offset account and using a credit card for their purchases and expenses made throughout the month. Critically, they then make a monthly lump sum payment from the offset account to their credit card provider to balance the credit card back to $0. Doing this avoids any interest charges and fees from the credit card itself.
As with many financial product features, there are often certain types of fees and premiums involved. While saving money long term is the focus here, you have to make sure you do the basic sums to ensure that the fees don’t end up costing more than the amount you save by reducing the interest bill on your home loan!
Some of the common fees and premiums involved with offset accounts can include:
Monthly account keeping fees.
Higher interest rates.
Case study: Offset account
Hoff Sette borrows $450,000 at a variable-rate of 3.00% p.a. paired with a 100% offset account. This loan bears no additional fees, yet has an interest rate premium of 0.10% compared to a loan without an offset account (at 2.90% p.a.). Hoff immediately deposits $25,000 into the offset account and keeps it there for the entire 30 years of the loan.
If we assume for simplicity’s sake that the interest rate stays at 3.00% p.a, the savings Hoff makes from the offset would be over $30,000 - much more than he would save by simply picking the 2.90% p.a. mortgage. This also helps him pay off the loan sooner, so it's a win-win for Hoff.