An offset is one of the most popular of the lending features available to borrowers – but do they help save you money?
Buying a home or looking to refinance? The table below features home loans with some of the lowest home loans with offset and redraw on the market for owner occupiers.
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Monthly repayments: $1,448
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A mortgage offset account is a transaction (or savings) account linked to your home loan. The money in this account is “offset” against the balance of your loan, meaning you only pay interest on the difference.
For example, if Louis had a loan of $450,000 and had $50,000 in a linked offset account, he would only have to pay interest on $400,000.
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.
You can see for yourself how effective an offset account can be by using Savings.com.au's Offset Calculator.
Offset accounts can be linked to either a variable or fixed rate home loan, with some lenders requiring an offset account for a portion of a fixed term.
While there are different variants of offset accounts available, by far and away the most common is the 100% balance offset account. As used in the offset account example above, the total offset account balance is subtracted from the outstanding loan balance before interest is calculated. Because of the ‘saving’ nature of a 100% offset account, the balance in the offset account doesn’t earn any interest (eg. this would effectively be ‘double-dipping’).
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.
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 do it for you!).
One of the ways that people manage to maximise the amount in their offset accounts is by putting all of their work income into their offset account and using a credit card for their expenses/purchases made throughout the month. Critically, they then make a lump sum payment from the offset account once a month at the time ‘due’ from their credit card provider to balance the credit card back to $0 (and hence avoiding 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. And 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 you 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:
Compare the different home loan fees here.
For some people, the benefits of a slightly lower home loan interest rate and the possibility of a reduced loan term outweigh the costs of maintaining an offset account. However, for many others who are able to consistently maintain a reasonable balance in the offset account, they can make a meaningful saving.
At the end of the day, it depends on your personal financial situation.
Putting extra repayments into your offset account could shave the same amount of time and money off your home loan as it would have if you’d made the extra repayments directly off your mortgage.
BUT, by putting this money in an offset account, you have the option of withdrawing some or all of these funds if the need arises. This may make you more comfortable to commit larger sums towards an offset account than towards extra repayments, which could see you save more on your mortgage.
However, having funds available to you in an at-call offset account may tempt you into withdrawing from it too often, thereby committing fewer funds towards your mortgage and reducing your savings. Ultimately, it comes down to your level of discipline.
Use Savings.com.au's Extra & Lump Sum Payment Calculator to see how these savings compare to using an offset account.
Your minimum monthly repayments will generally stay the same no matter how much money is in your offset account. Having money in an offset account just means more of your repayment amount will go towards paying down the loan principal and less towards interest. The money in an offset account is ‘offset’ against the balance of your home loan, so you only pay interest on the difference between the loan amount and the amount in your offset account.
This can considerably reduce the amount of interest you need to pay, so your monthly mortgage repayments reduce the loan amount faster.
As Savings.com.au explains, paying the minimum required repayment isn't always the best option.
You can withdraw from offset accounts since they operate like a savings account that’s linked to your home loan. But don’t forget that by withdrawing from your offset account, you’ll be reducing the balance that’s offsetting your interest costs.
You can only put funds from your super into an offset account once you’ve reached the age at which you’re legally allowed to access your super. If you’ve permanently retired, this may be between 55 to 60 (depending on when you were born) or after you’ve turned 65 (regardless of whether you’ve retired or not).
Generally, you can only have one offset account linked to one loan. Some lenders may allow you to have multiple offset accounts linked to one loan, however the majority don’t.
Like a typical bank account, you can generally deposit and withdraw money in and out of your offset account as much as you like, with the money instantly accessible. You can even arrange for your salary to be deposited into an offset account.
Redraw facilities, on the other hand, generally do not provide as much accessibility as an offset account. While they allow you to withdraw additional repayments, doing so may require you to make a request with the lender. These redraw requests are often subject to the lender’s approval and might not be granted that same day.
You may also have to pay a redraw fee each time you make a withdrawal from a redraw facility.
There are pros and cons to both redraw facilities and offset accounts, so one is not necessarily better than the other. While an offset account often offers more accessibility and flexibility compared to a redraw facility, home loans that come with offset accounts generally have higher interest rates than loans that only have a redraw facility.
Unlike a savings account, funds in an offset account do not earn interest, so there are no interest earnings to tax. Instead, the money in an offset account reduces the interest costs on the loan.
Offset accounts can be a great way to save money by reducing the interest you pay on your home loan, but you must maintain a reasonable amount of money in the offset for it to make a difference. By withdrawing the money in the account, you lose the benefits of having it in there, while potentially still paying a higher interest rate.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.
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