When taking out a residential mortgage, savvy borrowers look for ways in which they can minimise the amount of their repayments as well as the length of time they have the loan for.  

Potentially one of the most effective features offered by some lenders is an ‘offset account’. 

An offset account is a savings or transaction account linked to a home loan where the balance “offsets” against the outstanding loan balance, reducing the amount of interest paid on the mortgage – and can shorten the loan term. In simpler terms, it allows borrowers to use their savings to reduce the interest they pay on their home loan. 

How Do Offset Accounts Work? 

In an offset account, the interest is calculated on the difference between the outstanding balance of the home loan and the amount in the linked offset account. For example, if a homeowner has a $400,000 home loan and $50,000 in their offset account, they will only pay interest on $350,000.  

The balance in an offset account does not directly repay the home loan, but it reduces the interest calculated on the outstanding balance. 

Do I Need an Offset Account? 

There are several factors to consider when deciding if an offset account is right for you. If you have a significant amount of savings you can comfortably keep in an offset account, it may be a beneficial option. 

Additionally, if you are someone who is able to consistently save money and maintain a reasonable balance in your offset account, then an offset account can work to your advantage. However, if you struggle with saving or tend to use your savings quickly, then the benefits of an offset account may not be as significant. 

Downsides to Offset Accounts 

The main downside to an Offset Account is the loan interest rate may be slightly higher compared to a traditional home loan without this feature. Another factor to consider is offset accounts may come with additional fees or restrictions, such as a minimum balance requirement. It’s important to make sure you understand these fees or restrictions before committing to an offset account. 

Reasons for Having an Offset Account 

One of the primary reasons homeowners choose an offset account is the potential for significant savings on interest over the life of their loan. This can result in thousands of dollars saved in interest payments and a shortened loan term. There are also other benefits, including: 

1. Flexibility – Generally, homeowners can access their funds at any time without having to go through the process of refinancing or applying for a personal loan or using a redraw facility. This means if an unexpected expense arises, homeowners have easy access to their savings without incurring additional fees or penalties.
2. Tax benefits – interest earned through a savings account is considered taxable income, unlike interest saved by using an offset account. Depending on your personal circumstances, it may be advantageous if your offset account has a significant balance. Offset accounts also do not directly repay the loan account and therefore do not change the tax-deductible status of an investment loan.

Financial Comparison 

To better understand the potential savings of an offset account, let’s look at a financial comparison between a loan with an offset account and a traditional home loan. For this example, we will use the following figures: 

Using an offset account with a balance of $50,000 and assuming an interest rate of 6.29%, here is how the two options compare over the life of the loan: 

Source: bankwest.com.au offset calculator 

An offset account can provide significant financial benefits and flexibility, so it’s worth exploring this option. A broker can help you find suitable products. At Finance Advisory Co, we have access to a broad range of lenders, speak to us to find a solution that suits you. 

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