Home Loan Offset Accounts Explained
If you’ve ever had a home loan, chances are you will have heard of a home loan offset account.
An offset account starts life as a normal type of savings account. You can make deposits and withdrawals just like any other account, and you can generally make BPAY payments and direct debits etc.
The difference is that an offset account is linked to your home loan, and can help you to reduce the interest charged on your loan, which can lead to repaying your home loan sooner.
Types Of Offset Accounts
There are two types of home loan offset accounts available, these are 100% offset accounts and partial offset accounts.
The vast majority of offset accounts available in Australia today offer a 100% offset, so these are the accounts we will concentrate on in today’s article.
How An Offset Account Works
In its most basic form, a home loan offset account offsets the interest charged on your mortgage.
Let’s say for example you had a home loan balance of $100,000 and an offset account balance of $10,000. When your daily interest is calculated, the lender will offset your loan balance with your offset account balance, meaning that they would only calculate interest on $90,000.
Your loan repayment will remain the same, however less of the repayment will be eaten up by interest, meaning that more of your repayment will help to reduce your loan balance. Ultimately this helps to repay your home loan sooner.
How To Use An Offset Account Effectively
Many people with a home loan offset account make the mistake of not using it effectively.
To benefit from your offset account you must maximise the amount of money sitting in the account at all times. You should have your salary paid directly into the account along with any other income. You should also keep all of your savings in the account if appropriate.
Combining An Offset Account With A Credit Card
You can step up the benefits of an offset account through the effective use of a credit card.
By using a credit card with interest free days you can cover your monthly expenses on your credit card, then repay the balance in full each month to ensure you are not charged any interest on the card. In the mean time, this money is sitting in your home loan offset account and reducing the amount of interest charged on your home loan.
Should I Get An Offset Account?
It would be easy to think that a home loan offset account would be great for anyone, however there is a minor catch.
Basic home loans generally don’t have offset account facilities, so you will need to go with a more fully featured home loan. The problem is that the full feature home loans generally attract a higher rate of interest.
Before you decide to go with a home loan featuring an offset account, you need to take a look at your financial situation and calculate whether or not you would normally expect to have enough money in your offset account to make it worthwhile.
If you do not expect to maintain a decent balance in your offset account, you may be better off financially with a cheaper home loan that does not include an offset account.
Alternatives To An Offset Account
There are alternatives to home loan offset accounts. Most variable rate home loans now offer free redraws from the home loan. This means that any additional money paid into your mortgage can be withdrawn provided that you are still ahead in your repayments.
Any money that you would have placed in an offset account can be placed straight onto the mortgage, which will give you the same benefit of reducing the interest charged. The only downside is that you won’t be able to access the money via Bpay, ATM or EFTPOS in most cases, however you can still generally access the money within 24 hours via internet banking.
A home loan offset account can be a great way to repay your home loan sooner, however it is important to know how to use the account effectively.