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. 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 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.