Offset sub-account vs extra repayments

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? A redraw facility and an offset sub-account both have their merits, so it’s not really a case of better, but more what suits your financial circumstances.

In this article, 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 whenever you want to. For instance, your employer can deposit your salary into it and you can use it for everyday spending like groceries and bills.

The key difference is the money in an offset sub-account is offset against your mortgage balance - it’s linked to your home loan.

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?

What happens if there is more money in my offset than my loan?

While it might be possible, depending on your lender, to put more money in your offset sub-account than the loan itself, there isn’t much point and it won’t close your loan account. You would still need to discharge the loan.

Essentially, you won’t earn any interest on any money held in an offset sub-account even if the balance exceeds the outstanding home loan balance. In that case, it may be better to open up a high interest savings account or term deposit.

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.

In the case of an unexpected expense (renovations, car troubles), you are able to access the additional repayments made.

Benefits of making extra repayments on your mortgage include:

• Shortening the length of your loan and saving you thousands on interest costs
• 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 extra payments, how to decide what works for you

Having an offset sub-account or paying off your current mortgage faster certainly both have their advantages. The decision of which is the best option ultimately depends on what suits your personal and financial situation.

Both options will help you save on interest, just in slightly different ways.

First off, an offset sub-account is a separate deposit account whereas a redraw facility (where you make extra repayments) is not a separate account but a feature attached to your loan.

An offset sub-account can be beneficial if you’re looking for flexibility when it comes to accessing your funds without restriction - you can use a debit card linked to the account to make payments and transfer money in and out.

Whereas a redraw facility may not be as flexible as an offset sub-account. For example, you may not have the option to redraw money from an ATM or transact using a debit card. Plus, some lenders may set minimum redraw amounts. However, if you’re consistently able to make extra repayments above the minimum and may have the occasional lump of cash to put away each year, then a redraw facility may be a good option.

There are also some potential tax differences between the two options. If in the future, you decide to use your home as an investment property and rent it out, the interest charged on your home loan may be tax deductible. Using your offset sub-account won’t affect the tax deductibility of interest charged on your loan. But, with a redraw facility, you may not be able to claim for any money you’ve redrawn from your redraw facility for non-investment purposes like a new car or a holiday.

Remember, what works for one person may not work for another. Consider your options and make your decision on your current financial needs. You may even find most lenders offer customers both an offset sub-account and unlimited additional payments. In this case, you might consider making an extra repayment into your home loan each month while using an offset sub-account as your transaction account where you salary is deposited.

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

loans.com.au offers the feature of a offset sub-account with our home loans. Our variable loans include 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.

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

Alternatively, 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.

Offset Calculator