September 17, 2014
Often our clients ask for an offset account without fully understanding what it is, how it works, the difference between an offset account & a redraw facility, and whether it’s suitable for them.
An offset account is usually a transaction account that is linked to a home loan with the balance of the offset account offsetting the balance of the home loan. This helps to reduce the interest paid on the home loan and effectively shortens the overall term of the loan.
So how does an Offset account work?
Example: If the balance on your home loan is $325,000, and you have $25,000 in your linked offset account, the Lender will only charge interest on the $300,000 (ie. $325,000 less $25,000) instead of the balance of $325,000.
Offset accounts are usually full transaction accounts meaning you can deposit your salary into this account and use it for day-to-day expenses.
Most Lenders offer a free 100% offset account as part of their “package” home loan ie. “standard variable home loans” (rarely on basic home loans and fixed rate home loans).
Is an offset account right for you?
As a general rule, an offset could work well if you have substantial savings and a large mortgage. If you don’t have much in the way of savings and you are only likely to redraw extra loan payments in an emergency, a redraw facility can offer greater long term interest savings. Of course, plenty of mortgages offer both facilities (offset and a redraw) so it’s possible to get the best of both worlds. Keep your everyday spending money in an offset account, and tuck money you’re unlikely to need in the immediate future into your mortgage.
What’s the difference between an Offset account & Redraw Facility?
A redraw facility allows you to take back any money that you have ‘overpaid’ (ie surplus) into your home loan (example: if your minimum loan repayments for the year totalled $15,000 and you paid extra directly onto your home loan of say $5,000, ie you actually paid $20,000, then you would have this $5,000 available to redraw.
The redraw amount of that $5,000 would have reduced interest charges you were enjoying, so once you redraw/withdraw this token $5,000, your effective loan balance will go back up. Sometimes it can take time to access your funds via a redraw facility and you may also be charged a fee each time you use the redraw facility. Limits are often imposed on the amount of each redraw withdrawal as well as the number of redraws available each year; however, redraw is a common feature even on basic home loans.
Offset accounts are more flexible and many provide ATM access that let you withdraw money at any time without additional charges (remember however that the less you have in the linked offset account, the higher your home loan balance & the lower the interest savings).
At Mortgage Choice in Port Melbourne, we can help you compare a range of home loans and help calculate how much these options could save or cost you over the long term. Our article highlights the importance of seeking professional home loan advice by using a knowledgeable mortgage professional to match a suitable home loan to your individual circumstances & needs.