A mortgage offset account is one of the most useful home loan features around, and using one correctly could make a massive difference to how much you pay overall and in your monthly repayments.
Here we’ll answer some of the most common mortgage offset account FAQs, to help you decide if an offset account is right for you.
Does an offset account reduce your principal?
Essentially, yes, an offset account’s primary purpose is to reduce the principal owed on your home loan. An offset account is a kind of transaction account linked to your mortgage by the lender, and anything deposited into that account offsets against your mortgage principal.
Let’s say you owe $400,000 on a mortgage, and you place $50,000 into your offset account. In a 100% offset account (more on this later), this means you only get charged interest on the $350,000, therefore charging you interest on a smaller amount and reducing the length and overall cost of the loan.
The longer you keep money in a offset account, the more interest you’ll save on the loan.
How much does an offset account save?
A good mortgage offset account can save you thousands - even tens of thousands - in interest over your mortgage’s entire term. Using that example before, of a $400,000 loan with $50,000 in a linked offset account. On a loan:
You would reduce your loan term by around 4 years and save almost $44,000 in interest overall. That’s also just by adding a lump sum to the offset account, you could earn much much more by making regular contributions, such as by linking your salary to the offset account.
Use our home loan offset calculator to work out how much you could save
home loan offset calculator
Do you earn interest on an offset account?
Technically speaking, no, an offset account doesn’t earn you interest. What it does is instead save you paying more interest on a home loan. An account that earns interest is more like a savings account, which calculates interest based on the amount in your account up to a certain limit; usually has much lower rates on average compared to the rates offered by home loans; and requires you to pay tax on any interest earned as it is deemed to be income.
While you might only earn a marginal amount of interest in a savings account, that money tends to work much harder in an offset facility, saving you thousands and thousands of dollars instead of earning a moderate amount of interest like you would by storing it in a bank.
What is a partial offset account?
The examples we’ve used so far are of a 100% offset account, where 100% of the balance in the account is offset against the home loan. A partial offset account, on the other hand, only reduces the amount you are charged interest by a portion of the amount in your offset account. $50,000 in a 50% partial offset account, for example, would reduce the interest calculated on the loan by $25,000.
For this reason, partial offset accounts are less popular and generally less effective at helping you pay off your home loan. Try to find a mortgage with a 100% offset account if you can.
What is the difference between an offset account and a redraw facility?
Offset accounts and redraw facilities are a bit similar and are quite often bundled together, but still have a few key differences. Redraw facilities are usually offered on variable rate home loans only; with a redraw facility, you can make extra repayments into your home loan and redraw them if necessary. For example, you could withdraw $50,000 you’d saved into your home loan to pay for a big renovation, instead of taking out a new loan.
The flexibility of a redraw facility will differ between the lender. Some lenders will allow instant online redraws, others require you to make an application. You may also be charged a fee for each withdrawal, whereas other home loans offer “unlimited fee-free redraws” to let you draw upon your funds at any time.
What interest rates do offset account loans charge?
Although this isn’t always the case, it’s somewhat common for home loans with offset accounts to charge slightly higher interest rates and/or fees. That’s why it’s important to compare your home loan options and find one with a low rate and low fees.
What lenders offer offset accounts?
Offset accounts are not an uncommon product, and you’ll be able to find at least one offset home loan with most mortgage lenders in the country, from the big four banks through to smaller mutual banks.
But not all of them are built the same, and many of these lenders will offer offset accounts with fees, higher interest rates, limited redraws or clunky application processes.
At loans.com.au we provide the extra convenience of a combined 100% redraw offset facility, where 100% of the funds are used to offset your loan balance, and you have full redraw access. This loan also comes with no monthly or ongoing costs and easy access to your money via online banking, ATMs and a special VISA debit card.
To get the most out of your home loan offset and save thousands on interest costs, talk to a loans.com.au lending specialist today to get started on your application.