When you're applying for a home loan, there's one feature that could potentially save you thousands of dollars in interest over the life of your mortgage: an offset account. Yet many Australian homebuyers aren't fully aware of how these accounts work or whether they're suitable for their financial situation.
As Home Finance & Mortgage Brokers, we regularly help clients across Perth, WA and nation-wide understand their Home Loan options, including the benefits and considerations of offset accounts. Let's explore what you need to know about this potentially valuable mortgage feature.
What Is an Offset Account?
An offset account is a transaction account linked to your home loan that 'offsets' the balance against your loan amount for interest calculation purposes. Instead of earning interest on your savings, the money in your offset account reduces the amount of interest you pay on your mortgage.
For example, if you have a $500,000 home loan with a variable interest rate of 6% per annum, and $50,000 in your offset account, you'll only pay interest on $450,000 of your loan amount. This can result in significant savings over time and help you pay off your mortgage faster.
How Offset Accounts Work with Different Loan Types
Offset accounts are typically available with variable home loan rates rather than fixed interest rate home loan products. This is because lenders need the flexibility to adjust calculations daily as your offset account balance changes.
When calculating home loan repayments with an offset account, your lender will:
• Calculate daily interest on your loan amount minus your offset balance
• Apply this reduced interest charge to your monthly repayment
• Allow you to maintain full access to your offset funds
This means you can use your offset account for everyday banking while still reducing your home loan interest rate impact.
Benefits of Having an Offset Account
The primary advantage is interest savings. Every dollar in your offset account is essentially earning you a return equivalent to your home loan interest rate – tax-free. This is particularly valuable when property market conditions mean Home Loan Rates are elevated.
Additional benefits include:
• Flexibility to access your funds at any time
• No loss of liquidity compared to making extra repayments
• Potential to significantly reduce your loan term
• Tax advantages, as you're saving interest rather than earning taxable income
Who Should Consider an Offset Account?
Offset accounts work particularly well for borrowers who:
• Maintain substantial savings balances
• Receive irregular income or bonuses
• Want to preserve access to their funds
• Are in higher tax brackets
• Have maximised their loan to value ratio (LVR) and want to build home equity efficiently
During the application process, your mortgage broker can help assess whether an offset account aligns with your borrowing capacity and financial goals.
Potential Drawbacks to Consider
While offset accounts offer significant benefits, they're not suitable for everyone. Some considerations include:
• Higher ongoing fees compared to basic home loan products
• Typically higher interest rates than the lowest variable interest rate products
• Reduced benefit if you don't maintain substantial balances
• May not be available with all lenders or loan types
When you get pre-approved for your Home Loan, it's worth comparing the total cost of a loan with an offset account against alternatives.
The Application Process and Documentation
When applying for a home loan with an offset account, the application process remains largely the same. You'll still need to provide banks statements, demonstrate your borrowing capacity, and potentially pay lenders mortgage insurance (LMI) depending on your loan amount and deposit.
However, having access to Home Loan options from banks and lenders across Australia means you can compare different offset account features and fees. Some lenders offer multiple offset accounts, while others provide partial offset functionality.
Making the Most of Your Offset Account
To maximise the benefits:
• Direct your salary and other income into the offset account
• Pay bills and expenses just before they're due
• Consider using the offset account for saving towards future goals
• Review your balance regularly to understand the interest savings
Remember, when buying a home, you'll have various upfront costs including stamp duty. An offset account can help you rebuild your savings after settlement while simultaneously reducing your mortgage interest.
Getting Professional Advice
Choosing the right home loan structure is crucial for your long-term financial wellbeing. With numerous Home Loan options available and varying interest rate discounts across lenders, professional guidance can help ensure you select the most suitable product for your circumstances.
A streamlined application process with the right lender can make your Home Loan pre-approval experience more efficient, while ensuring you understand all features of your chosen loan product.
Offset accounts can be a powerful tool for reducing your mortgage costs and building wealth over time. However, they're not a one-size-fits-all solution, and the benefits depend heavily on your individual financial situation and how you use the account.
Call one of our team or book an appointment at a time that works for you to discuss whether an offset account could benefit your home loan strategy.