Offset accounts, know the difference

April 09, 2014
Steve Pratt

An offset account save you money on your home loan

An offset account is a transaction account linked to your mortgage, where cash in your transaction (offset) account reduces the amount of interest payable on your mortgage. This helps to save you money in interest repayments that in turn can help you pay off your home loan quicker.            

How does it work?

Many of us have a savings or transactional account that we use for our daily banking.   Instead of this account earning interest, the interest is “offset” or taken away from your full loan balance, i.e. you are charged interest on your full loan minus the balance in your offset account.

For example, if your home loan balance is currently $300,000 and your linked offset account has $5,000, you are charged interest based on $295,000.

The savings in interest payments mean that more of the repayment goes towards paying off the principle amount.

Moreover, because you are not earning interest on your offset account, the funds are not considered by the tax department as income producing and therefore not taxable.

Not all offset accounts are the same.

Some will offer 100% offset, whilst other lenders will only have a partial offset. Partial offset generally means that any interest earned on your savings is offset against the interest charged on the mortgage. The interest earned is most often a much lower rate than the mortgage and so the offset effect is negligible. When considering a mortgage with an offset account ask your lender, is it a 100% off-set?

Most offset accounts are only available with variable rate home loans that contain a higher interest rate or with package loans that charge an annual fee. There are however some of the smaller lenders offering an offset account with their fixed loan product. You should consider the overall savings including any fees and charges; if you tend to only have around $1,000 in your offset account at any one time, you may be financially better off with a basic home loan with no offset facility but a low interest rate.

Another alternative that some lenders also offer is a “repayment-offset” option. This enables customers to use their offset balance to reduce their home loan repayments. Rather than reducing the balance of the loan, and thereby the interest accrued and the term of the loan, this option would reduce their minimum monthly repayment amount, leaving the loan balance and loan term untouched.

To see whether an offset account will be of benefit to you, or to learn which products are available, contact Fiona Manley  on 0421 360 205.

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