How does a home loan offset sub-account work?
What is an offset account?
First off, what is an offset account or offset sub-account? An offset is a facility linked to your home loan and essentially functions as any other normal transaction account would by allowing the withdrawal and depositing funds.
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, the money in this facility is ‘offset’ against your home loan debt when interest is calculated, reducing the amount of interest charged on your home loan. Offsets are popular amongst most buyer groups as they can greatly reduce the interest paid over the life of the loan.
Offset accounts can be a much more beneficial place to store your savings than a standard savings account. This is because you might only earn a marginal amount of interest in a savings account and as such, money tends to work much harder in an offset account.
How does an offset account work?
An offset works by only charging interest on the net balance in your home loan, being the loan balance minus the amount in the offset sub-account. To illustrate, you have $10,000 in your savings account, and you owe $400,000 in your mortgage, the interest on your home loan will be calculated on $390,000.
In other words, the money you have in your offset is deducted from the balance of your home loan - assuming you have a 100% offset.
Your monthly mortgage repayments with an offset will still be the same, but more of it will go towards paying off the principal of your home loan rather than the interest. An offset account helps you pay off your mortgage quicker with less interest, while having the ability to access the money you have in your account.
While offset 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.
For example, 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.
What are the benefits of an offset?
An offset can help you to pay off your home loan faster. This works whether you’re an investor or a home buyer.
Since an offset is an everyday transactional account, it is very easy to withdraw money as you need it. You can ask your employer if they can put your salary into your account or offset sub-account.
The money works harder in an offset facility than a standard bank account.
Find out more about the benefits of an offset account.
Does an offset account reduce your principal?
Essentially, yes, an offset sub-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 to create "the offset effect" to maximise your savings
A 100% offset with no ongoing or monthly fees
You're in the right place. loans.com.au offers an offset add-on to our Smart Home Loan with unlimited redraws and unlimited additional repayments.
Pay your salary directly into your offset
Every dollar in offset saves you money every day. So to boost the savings with the Offset Effect, have your salary paid directly into your offset. Setting this up is easy with the benefit that your salary is immediately put to work for you to reduce the interest on your home loan.
Wait to pay your bills
Paying your bills on the due date means your money is working for you right up until it leaves your offset. It's reducing the amount of interest on your home loan, not gaining interest in a big corporation’s investment account.
Throw in any savings
If you're saving for a holiday, new car or even school fees, you can use those savings to help pay off your home loan faster. Deposit them in your offset until you need the money so you will pay less interest. Those extra thousands can make a big difference.
Search your couch and go coffee free
Every dollar counts with the Offset Effect. So go nuts! Put that spare change that sits in a jar or lies hidden in the couch to good use. And ditching coffee for a while can really add up too. One $4 coffee each day is $20 a week or $80 a month – almost $1,000 a year off your loan.
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.
Offset vs 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.
Check out loans.com.au’s offset sub-account
loans.com.au offers the feature of a offset sub-account with our home loans. This loan includes unlimited, fee-free redraws, no monthly or ongoing fees, full access to your money in the offset sub-account via a free VISA debit card and more.
Speak to one of our lending specialists on how you can benefit from an offset sub-account. Use the button below to pre-qualify and schedule a call.
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. 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.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.