Offset sub-account vs extra repayments

Offset sub-account vs extra repayments
Reducing the length of your home loan can reduce the amount of interest, saving you thousands. But is it better to reduce your mortgage repayments by making additional repayments or leaving the money in an offset sub-account?
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People typically get home loans for a term of 25 to 30 years. Reducing the length of your loan can drastically reduce the amount of interest you pay, potentially saving you thousands.

But is it better to reduce your mortgage repayments by making additional repayments or leaving the money in an offset sub-account?

We'll take you through the benefits of both, and how to decide which may work best in your situation.

What is an offset sub-account?

An offset sub-account is very similar to a normal transaction account, in that you can withdraw and deposit money from it. The key difference is the money in an offset sub-account is offset against your mortgage balance.

Essentially, the more money in your offset sub-account, the less interest you're charged on your mortgage.

As an example, if you had a $500,000 home loan and $50,000 in an offset sub-account, you'd only be charged interest on $450,000 of the loan.

Benefits of using an offset sub-account include:

  • Daily and unrestricted access to your money via VISA debit card whenever you wish, via eftpos, ATM or online

  • Could reduce the length of your loan saving you thousands of dollars on interest

  • No withdrawal fees

  • Potential tax benefits as savings kept in an offset sub-account are not considered taxable income 

But how does using an offset sub-account compare with making additional repayments?

Why pay off more of your mortgage than is required?

Mortgage repayments are typically calculated on the minimum amount needed to be repaid each month. Often, people will simply pay this amount and ‘set and forget'.

But paying off more than the minimum can greatly reduce the interest you end up paying as you're shortening the length of the loan.

Additionally, paying off your mortgage in a lump sum, if you had a windfall of cash, for example, would have the same effect.

Benefits of paying off more of your mortgage include:

  • Shortening the length of your loan and saving you thousands on interest cost

  • By making large lump sum payments, you could request to have your mortgage recalculated over the remaining term to have a cheaper repayment down the track.

  • Unlimited extra repayments are commonplace

So which one is better to use? Both will reduce the overall interest owed on the principal of the loan, but which one is right for you depends on your financial situation. 

Offset vs payments, how to decide what works for you

Having an offset sub-account or paying off your current mortgage both have their advantages, but one is likely to be better for you based on your personal circumstance.

An offset sub-account is great for people looking for flexibility, particularly people who are making the often harsh change from rental to mortgage repayments.

An offset sub-account is great for someone who may not have a large disposable income and may need to access the cash in their offset sub-account but still wants to save on interest.

It's often recommended you deposit your salary straight into your offset sub-account and use it as your main transaction account.

It's also great to use as an emergency fund, or if you're saving for a holiday or another big expense.

Paying off more than the minimum is great for people who might have a higher disposable income and have had their home loan for a few years. Paying off your home loan sooner will also help save you from any extra interest.

The advantage of extra repayments is if for whatever reason, you want to stop, you can simply revert to the minimum for as long as you need, and you've still saved yourself on interest costs.

Getting an offset sub-account with loans.com.au

Our Smart Booster Home Loan is a 1.99% p.a. introductory variable rate (2.21% p.a. comparison rate) and is available for two years before reverting to a rate of 2.25% p.a.

Both loans come with the option to add an offset sub-account for just 0.10% more and also offer the ability to make unlimited additional payments.

Both loans are available to borrowers with a Loan to Value Ratio (LVR) of up to 80% and have a maximum loan amount of $1,000,000.

Calculate how much you could save over time by using our offset calculator

Alternatively, get started on your home loan journey with us by qualifying below.

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