The offset account explained: What is it and how does it work?
A unique tool to help you save money on your home loan repayments.
An offset account can be a really great addition to your home loan tool belt. Most lenders offer an offset account with their home loan, but before accepting it as part of your package, discover how it works and the ways you can use it to your advantage.
What is an offset account and how does it work?
An offset account is a transaction account that's linked to your mortgage account. This means that your offset account could have a number of cards and assets attached to it, including:
- Debit cards
- Online banking access
- Salary credits
- Direct debits
Without an offset account, you end up paying interest on the total amount owing on your home loan. But with an offset account, instead of being charged interest on the full balance owing to the bank, you're charged interest on your home loan balance less the amount in the linked offset account.
For example, if your loan is $500,000 and you have $100,000 in an offset account, interest will only be payable on $400,000.
How much can you save with an offset account?
Offset accounts will reduce your overall interest payments, since mortgage interest is only charged on the net balance. Your repayments will remain the same, however, more of your repayment goes towards the actual loan amount instead of the interest since the offset account lowers the interest due on your home loan. This means you could save thousands in the long-run, depending on the size of your loan.
What products will come with an offset account?
Not all home loan products come with an offset account — it’s important to know which ones do, so you can find an option that suits your financial needs:
- Variable home loan products
- Packaged home loans (with variable rates)
- Basic home loans
- Some fixed-rate home loans (very limited options)
Other considerations before opening up an offset account
In addition to the above-mentioned points, it's noteworthy to point out things which require consideration before setting up an account.
Does it work with your property buying strategy?
We all buy property for different reasons — to be the owner-occupier, as an investor — and depending on your buying strategy, you may need professional advice to see whether an offset is suitable for your needs. For example, if you’re risk-averse and an owner-occupier, you may prefer to fix the full amount of your loan as an offset account has a variable rate.
Does it change your savings strategy?
Generally speaking, using an offset account is a better option compared to parking money in a savings account or term deposit. Savings accounts roughly earn about 3% interest, but an offset account will offset the interest paid on a home loan, which is usually more than 3%. Assess whether keeping your savings in an offset account is better for your long-term financial health.
How do you set it up?
In most cases, your banker or mortgage broker would set up this account as part of their service. But if you want to do it yourself, it's relatively simple. Once you establish that you are entitled to an offset account, you can simply open a transaction account and change this to an offset account. Some banks might need you to complete a different form, while for others it might just be a simple switch.
Can you have multiple offset accounts?
With some banks, you can have multiple offset accounts linked to one variable loan. For example, with a St.George Bank Advantage Package Home Loan, you could have 99 offset accounts, but there is a catch — the first account is free, while the rest will cost you $5/month (unless you deposit $2,000/month). Be sure to read the fine print if you choose to set up multiple offset accounts.
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