How does adding an offset affect your home loan?

Want to reduce the interest charged on your home loan and save thousands of dollars? Having an offset facility is probably the best way to do so.
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If you want to reduce the interest charged on your home loan and save thousands of dollars over the life of your mortgage, then having an offset facility could be the best way to do so.

Having an offset facility linked to your home loan can leave you much better off over time compared to those who don’t have one. In this article, we’ll explain what an offset is and how it can help you save money on your home loan.

What exactly is an offset?

A redraw offset facility, or simply an offset is a separate sub-account of the loan that acts like a regular bank account, allowing you to deposit and withdraw money from it. But the difference between a bank account and an offset facility is that unlike a bank account, an offset facility doesn’t earn an interest rate per-say. Instead, it offsets the amount in the account against your remaining home loan balance.

So if, for example, you have a $400,000 loan and put $50,000 in an offset facility, you will only be paying interest on $350,000: $400,000 minus $50,000. This is assuming it’s a 100% offset facility. Other offset facilities only offset the amount by a portion, such as a 50% offset. In this case, you’d be offsetting your loan by $25,000 (half the amount in the offset facility).

This can be a very effective way of saving money on a mortgage, as you’re essentially paying interest on a much smaller amount.

Why not just use a savings account?

An offset can be a much more beneficial place to store your savings than a standard savings account. Savings accounts and other bank accounts tend to have very low interest rates, whereas your offset facility will reduce your loan balance on a home loan that, in most cases, will have a higher interest rate than a savings account. 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.

It can also be more tax-effective to use an offset facility. Interest earned in a savings account is usually taxed at your marginal tax rate as it is considered income, while you aren’t actually earning anything in an offset facility. So in addition to saving money on your loan, you can also pay slightly less tax.

How much can an offset facility help you save?

As mentioned earlier, an offset facility can help you save money on your home loan. How much? Well, it could be thousands depending on how you use it.

Let’s use that example from before: A $400,000 home loan with $50,000 in an offset facility. If:

  • The loan’s interest rate is 3.00% p.a (variable);

  • The loan term is 25 years;

  • The repayment frequency is monthly; and

  • You put the $50,000 into the facility after 2 years

Then you would reduce your loan term by around 4 years and save almost $44,000 in interest over the loan term.

This is much more than you'd earn in a savings account, although it’s impossible to say whether savings account rates will change over that same time period. You could also save much more over the life of your loan if you make consistent contributions to the offset facility.

Use our home loan offset calculator to work out how much you could save on your home loan.

HOME LOAN OFFSET CALCULATOR

You need to keep the money in there for it to work

While offset facilities can be very effective as shown above, this only works if you keep the money in there. If you take the money out for any reason - whether that’s to pay for a renovation, an existing debt or a big life event - then that amount of money you’ve taken out will be re-added to the loan balance.

In this case, if you withdrew $20,000 from the $50,000 in your offset facility, then instead of paying interest on $350,000, you’d now be paying interest on $370,000.

Pros and cons of an offset

While offset facilities can help you save, it’s important to research whether it’s the right choice for you. The table below showcases both the pros and cons of home loan offset facilities.

Pros of offset facilities

Cons of offset facilities

They can create massive interest savings

Loans with this feature can come with a slightly higher interest rate or ongoing fees

You can pay off your loan faster

Some offset facilities only offer partial offsets, not 100%

The money works harder in an offset facility than a standard bank account

Not all loans have it - it’s usually only available on variable rate loans

They’re generally more tax-effective than a bank account

They’re a flexible product - you can draw upon the funds if needed

You can have your salary directly deposited into the facility

Check out loans.com.au’s 100% redraw offset facility with VISA debit access

The more money you have in an offset facility, the less you can pay overall and the more time you can save. If this sounds good to you, then why not take a look at loans.com.au’s 100% offset facility with VISA debit access. This offset facility is a flexible added feature to many of our home loans that allows you to offset 100% of your facility’s balance against your loan balance, with no monthly or ongoing costs and easy access to your money via online banking, ATMs and a special VISA debit card.

Apply now or book an appointment with one of our friendly lending specialists to learn more about this useful home loan feature.

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Tags: home loan offset account | offset account | redraw offset facility

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