Offset accounts are often talked about as a ‘must have’, but I find a lot of people have no idea what they are and what they can do for you. and worse a lot of people have them and are not using them properly and it is costing them.
If you want to pay off your home loan or mortgage sooner, or accumulate funds ready for to buy an investment, a home loan with an offset facility attached can be a very useful tool for achieving these goals.
How it works
A offset account is simply a transaction account (or savings account) linked to your home loan account. It works just like a regular savings account with ATM access, PBay etc. The big difference is the balance in the savings account is ‘offset’ against the amount owing on the home loan before interest is calculated.
It is quite simple, don’t make it complicated… Think of it like this:
Home Loan balance = $100,000
Offset account balance = $10,000
You are then charged interest on the difference = $90,000
It is the same as putting $10,000 onto the home loan. The only real difference is that it sits in a separate side account.
There for if you keep a healthy balance in the offset account you can save considerable interest over the course of the loan.
What are the benefits?
- Every dollar in the account saves interest on your home loan
- You can pay your salary straight into the offset account
- You can pay other income (like rental income) straight into the offset account
- Additionally as you are ‘saving interest’ not earning it, the benefit is non-taxable.
- The interest saving on the home loan is higher than interest in a term deposit or online saver account, for example
– Home loan interest rate – around 5%
– Savings accounts interest – around 4% (and then this income is taxed)
Offset accounts enable you to make the most of your income and other funds to reduce the interest payable on your home loan, thereby reducing your loan term.
What are the downsides or potential pitfalls?
- in almost every occasion the bank or lender will charge you (normally annual fees) for the benefit of having the account – it does not matter if you use the account or not
- there for if you are not using the account properly it will cost you to have the account
- you need to maintain a reasonable ongoing balance in the offset account to get any benefit
- mostly offset accounts can only be attached to variable rate loans
Is an offset right for you?
The answer is… it depends!
It depends on you and your personal spending habits. If you spend every last dollar every month, then there is probably no point in having one as the benefit would be minimal.
However if you have funds in the account consistently then you will get a benefit and the more funds the better.
So if you are considering getting an offset account, let’s talk. Let’s look at your behaviour and also your goals and see if it is the best option for you and see if it is something we can implement into your mortgage plan.
I hope that helps
David Johnson – The Home Loan Guy