Home Loan Offset Accounts: What Are They & Can You Save?

How much can you save with a home loan offset account?

An offset account is one of the many lending features available to borrowers – but do they help save you money?

What is a home loan offset account?

An offset account is a transaction (or savings) account which is 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.

What types of loans can offset accounts be used with?

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 Louis 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’).

 

 

How much can you really save with an offset account?

To accumulate the most savings, the amount of money sitting in the offset account must be consistently at a reasonable level (eg.$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:
  • Standard transaction fees
  • Application/establishment fees
  • Higher monthly account keeping fees
  • Higher interest rates

Offset Account Case Study: Louis borrows $450,000 and decides to go with a 100% offset account loan which costs him nothing extra in fees, but attracts an interest rate premium of 0.1% p.a higher than the same loan without the offset account. At the end of the first year of his loan (which has a 3.9%p.a interest rate), he has managed to maintain $25,000 on average in his offset account across the entire year.

The saving Louis makes from the offset account (eg. $25,000 multiplied by 3.9% =  $975) exceeds the extra he’s had to pay from the 0.1% p.a premium on the interest rate (eg. $450,000 multiplied by 0.1% = $450). So in effect, he is $525 better off.

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.

Savings summary

  • 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.
  • The overall saving of an offset account is the interest savings over the loan term, minus:
    • any extra costs of an offset account (eg. higher home loan interest rate); and
    • how much you’d have earned by placing the offset money in a high-interest savings account instead.