In our offset account guide:
An offset account is a home loan feature that allows you to use your cash savings to reduce the amount of interest you pay on your loan. It can mean big savings on your mortgage and shave years off your loan.
It’s basically a transaction account linked to your home loan. The balance of the account reduces or ‘offsets’ the balance of your home loan that interest is charged on.
“If you have more than $20,000 in savings and/or you are willing to have your income paid into your offset account, there is usually a net financial benefit,” explains Money.com.au’s home loans expert and mortgage broker, Mansour Soltani.
If your home loan has an offset account, you can deposit money into it and make withdrawals as you would with a standard transaction account.
This could be your cash savings, salary payments and any lump sums you happen to receive – your end-of-year tax refund, for example.
Your offset account will also generally come with a debit card, meaning you can use it for day-to-day spending and to pay bills.
The key difference with a mortgage offset account is how it works alongside your home loan. When your lender calculates the interest charged on your home loan, it deducts the balance of your offset account from your home loan balance.
This means you’re charged interest on a lower amount, which saves you money.
This means every dollar in the offset account contributes towards reducing your home loan balance for calculating interest. A home loan with 100% offset offers the biggest potential interest savings. Full offset is more commonly offered on variable rate loans.
A home loan with partial offset means only a portion (e.g. 50%) of the offset account balance reduces your interest costs. Alternatively, a reduced interest rate could be applied to the full offset balance. Partial offset is less common but is a feature of some fixed-rate loans.
We asked mortgage broker Rebecca Jarrett-Dalton of Two Red Shoes for her take on some of the common strategies borrowers with a mortgage offset account may use.
While there are a few ways of setting it up, she said in her experience fitting the offset account around existing ‘“good baking habits” that are serving you well can work best.
“It's much easier to do that than to try and teach someone new banking habits to fit around their home loan.”
Rebecca says for people who primarily bank from a single account, an offset account could fulfil that role.
“Maybe they have one account with a chunk of money in there, all their bills come in and out of it and it’s also their wages account. They could be the perfect candidate for an offset account”.
Rebecca says this is the approach she takes herself.
“All my bills can come in and out of my offset account without me having to pay attention to that.”
With this method, as much of your spending as possible goes on a low-cost credit card, which is paid off in full every month to avoid interest charges. The idea is to keep your offset balance as high as possible for as much of the month by using the credit card for spending.
Rebecca says this is a strategy many of her clients want to discuss but the outcome can be mixed.
“Depending on how much you're spending, this can save considerable amounts of interest. The challenge is if you're not using your own cash, you can overspend. You'll get tap happy.”
If you are exploring this strategy, choosing the right credit card is also key.
“Your credit card has to have little or no fees, you absolutely have to pay it off on time and you have to have a good interest-free period. So, for example, a 55 days interest-free period. Then set up your card so it’s paid off automatically.”
“We will set them up from the beginning to put the minimum repayments into the loan and keep building their future deposit for the next home in the offset. This can give you a nice chunky deposit to go into your second property.”
It’s important to get professional advice from a broker or financial adviser if you are considering any of these strategies.
Home loans with an offset account tend to be more expensive than loans that don’t. The extra cost can come as a direct offset fee (e.g. $10 per month), as part of a home loan package fee (these can be up to $400 per year) or a higher interest rate.
Analysis by Money.com.au found that among the 40 loans with the lowest interest rates for owner occupiers, only 6 (or 15%) of them offer an offset account.
For example, these two loans are identical apart from the offset account which adds 20 basis points to the interest rate.
The extra costs mean opting for a loan with an offset account isn’t right for everyone.
“There's no point in taking an offset unless you're going to keep a reasonable amount of cash regularly in that account,” Rebecca explains.
Your loan balance matters too.
“If you're paying a big annual package fee, once your loan balance gets below a certain level, the fee is now potentially more than the interest you could be saving.”
However, if you have a higher loan balance and a decent amount of money saved in your offset account, the interest savings have the potential to far outweigh the costs.
Of course, there are some loans with very competitive rates that offer an offset account at no extra cost. The key, as ever, is to shop around.
May mean you have to pay an extra fee on your home loan or a higher rate.
Unless you have a good amount of money in savings, it’s unlikely to make a big difference.
If you want a home loan with an offset account, your range of loan options will be reduced (e.g. most fixed-rate loans don’t offer offset).
If you switch home loans down the track, you may need to do some financial readjusting (e.g. changing direct debits, salary payments).
|Home loan offset account
|High interest savings account
Your savings reduce the balance of your home loan that interest is charged on.
You earn interest on your savings.
You save interest based on whatever your home loan rate is.
You earn interest at a variable rate set by your bank.
Unless it’s a 100% offset account, only a portion of your savings will save you interest.
You often need to meet certain criteria to qualify for the top rate of interest.
Because you are saving, not earning interest, you won’t need to pay tax.
You may need to pay tax on interest earned.
Speaking from personal experience, our offset account is a simple, low-effort way for us to save money. Having bought our first home relatively recently, we still have a fairly high loan balance and the offset account is a good way for us to take the sting out of the interest costs.
This has become particularly important recently as rates have risen significantly since we got our home loan.
We do pay a higher interest rate than we could probably get elsewhere, but it’s a net positive for us.
But as Rebecca explains, it’s not right for everyone.
“I would say probably 90% of borrowers I see say ‘I want an offset account’, or ‘I've heard I need an offset account’. But it's not a one-size-fits-all band-aid fix for borrowers. It comes down to how you use your money and how you bank. It's also not the only thing you can do that will save you interest.”
Rebecca Jarrett-Dalton, Mortgage Broker
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