What is an offset account and do I need one?

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An offset account is a savings account that is linked to your loan account.  Every day the lender will calculate the difference between the amount owing and the amount in your offset account and charge interest on the resulting figure.  As an example, if you owe $500,000 and have $30,000 in your offset account, the lender will charge interest on $470,000 ($500,000 - $30,000 = $470,000).

As a general rule, most lenders only provide the offset feature on their Standard Variable Rate (SVR) loan.  The SVR generally has a higher rate of interest than the lenders basic or ‘no frills’ loan, however, most lenders will discount the SVR if you are borrowing a large amount of money.  In simple terms, the larger the amount borrowed, the greater the discount.

It really doesn’t make sense to potentially pay a higher interest rate and higher fees for an offset account if you have only a few thousand dollars in the account on a daily basis.  In this case, you might be better off with a basic variable loan with free redraw.

Does it sound a little confusing?  It can be.  This is why it pays to speak with a mortgage professional who will ensure you get the right advice so you can might an informed decision which will serve you well for many years.

Posted in: Home loans

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