Want to save money on your home loan repayments? An offset account is one of the main features to consider — especially with variable-rate home loans. It’s one of the many perks competitive lenders offer to maximise your business and can be incredibly useful in a time of higher interest rates.
But how does a home loan offset account work in Australia? And how can home buyers take full advantage of it?
Here’s what you need to know.
What is an offset account?
An offset account is an everyday bank account attached to your home loan. Its main purpose is to reduce the home loan interest you pay.
How does an offset account work?
Money stored in an offset account ‘offsets’ your home loan balance, i.e. reduces the loan amount you pay interest on.
For example, Gretchen has a $500,000 left on her variable home loan but $100,000 in a 100% offset account. Her lender will subtract her offset account balance from her loan balance and only charge interest on the remainder.
- $500,000 - $100,000 = $400,000
So, instead of making interest repayments on $500,000 worth of debt, Gretchen only pays interest on $400,000.
This doesn’t mean the offset account lowers Gretchen’s principal — she will still have to pay back the $500,000 she owes the lender. But it can cut down the interest she repays over the life of the loan.
TIP: Some offset accounts are only partial offset accounts, meaning only some of the money in the account reduces the interest on a home loan.
Benefits of an offset account
The main perk of an offset account is saving the amount of interest you pay. Paying less interest means more money in your pocket, which you can use to hit other life goals like travelling, completing renovations, or even paying down your home loan faster.
An offset account also functions like a day-to-day bank account. Some offsets behave more like transaction accounts and come with a debit card, while others are like savings accounts, giving you a handy place to store your money.
Remember that you don’t earn interest on an offset savings account — you just save interest on your home loan. But depending on your financial situation, you could ‘earn’ more money back on an offset account than a high-interest rate savings account or term deposit.
Offset accounts can also be a more flexible alternative to making extra repayments with a redraw facility. While withdrawals from your extra repayments can come with fees and require paperwork, offset accounts can be easily accessed and used.
Drawbacks of an offset account
The main downside of an offset account is that it’s more common on variable interest-rate home loans than fixed-rate home loans. So, if you like the idea of consistent interest payments more than an offset, you may need to keep looking.
Your offset account will also be with your lender, so you must research how the account works to see if you feel comfortable banking with them. Look at the product disclosure statement (PDS) and target market determinations (TMDs) to get the full story on T&Cs and disclaimers, including any account-keeping fees.
Additionally, if you’re a first home buyer and using most of your existing savings to buy property, you may not get as much value from an offset account at the start of your home loan as other borrowers. (Though this will depend on the account and lender, of course).
Finally, how useful an offset account is will depend on how you use it. If your offset is constantly running low, it’s not ‘offsetting’ your loan balance or saving you as much interest as possible.
For this reason, it’s also important to pay attention to your home loan interest rate, comparison rate, and LVR when comparing features — these have the most direct control over the costs of your interest repayments.
How to best use an offset account
The best way to use an offset account will depend on your financial situation and lender, but generally, getting the most out of it means keeping your offset topped up. If your offset account is consistently getting low, it’s not working hard.
Instead, some tactics to try include:
- Sending your paychecks to your offset account first.
- Making everyday purchases with a credit card so your offset stays fuller longer.
- Diverting any extra cash into your offset savings account.
Keeping your offset full ensures you get every ounce of value from it.