What is an offset account?
A home loan is a major financial commitment. This is why it’s a good idea to use products that will help you manage this commitment. Put simply, an offset account is a savings account that ‘offsets’ your loan balance and can help you pay it down more quickly.
Here's an example: Sarah and Tom have a $400,000 Mortgage Breaker home loan. They also have $40,000 in a Mortgage Breaker 100% offset account linked to their home loan.
Instead of paying interest on the full $400,000, their offset account balance means they only pay interest on $360,000 ($400,000 – $40,000). If their home loan interest rate is 3.94%p.a Claire and Sam would pay $1,706 interest in a month instead of $1,896 – saving them $190 just because they have an offset account. A bonus feature is that they can access their money at any time if needed. It is important to note that an offset account, while it is a savings account, does not attract any interest.
Why get an offset account?
A mortgage offset account with a substantial balance will reduce the amount of interest you pay on your home loan, which will reduce the amount you pay over the life of the loan.
An offset account can be used just like a savings account where you can make regular deposits. The bigger the balance, the more it’s helping you to pay down your home loan. If you come into an inheritance, earn winnings or some other form of income, holding it in your offset account will ensure you’re maximizing its effectiveness in regards to your payments. You’ll be able to manage your offset account from within Online Banking and our mobile banking app.
When you log in, you’ll be able to see the balance and make deposits, transfers and withdrawals. There are no withdrawal limits from an offset account and transfers are instant.
What should you look for in a mortgage offset account?
Not all offset accounts are the same. Some offset 100% of your loan, while some offset a smaller percentage so make sure you check the details of the account. Be on the lookout for:
A 100 percent (full) offset account, rather than a partial offset
Easy access to your offset funds
No balance limit or penalties for withdrawal
Any monthly or annual fees for having an offset account
Some financial institutions may offer multiple offset accounts linked to one loan, which can help if you're saving for a few big-ticket items like another property, a holiday, a wedding or a new car.
Look out for any fees associated with multiple offset accounts.
How much money do you need in an offset account to make it pay?
Having a substantial balance in your offset is going to maximise its effectiveness in reducing your interest costs. While you can use it as a savings account and withdraw money from it, any money
regularly withdrawn from the account may not be beneficial. If the money is leaving the account as quickly as it goes in, the benefit is going to be minimal. Unless you have money sitting in this account long-term, you may only see little or no benefit.
You may also want to consider the interest you would earn in a regular savings account that has an attractive interest rate. If using an offset account, will the reduced interest on your home loan be greater than the interest you would earn, if your savings in the offset account were in a savings account?
Is it better to have money in offset or redraw?
Offset and redraw facilities offer the same savings concept but are different in how they work. They both can help you pay off your loan earlier by reducing the amount of interest you pay on your home loan. Both are generally available on most standard variable rate loans.
An offset account works like a savings account. You can have your pay deposited there, link a debit card to it, and make regular deposits and withdrawals. Alternatively, a redraw is a loan feature. You can only use your redraw if you have made additional repayments to draw from.
Making extra repayments into your loan can increase the equity in your home, reduce your loan repayments and will help keep extra savings out of sight, out of mind.
Many loans now have a redraw feature that allows you to make additional repayments to your loan. Some lenders may have a redraw minimum or a fee for using the redraw feature.
You may be able to use an offset account and the redraw feature on your loan, it doesn’t have to be one or the other.
Ultimately, which one you prefer to use comes down to how you manage money. If you need discipline and don’t want to access the funds as you would from any other account, a loan redraw facility may be the best option.
At Horizon Bank, we’re here to help you with your personal banking needs. Get in touch with our friendly team today and let’s chat about your home loan and investment loan options. Speak to a real local person with branches conveniently located across the Illawarra and South Coast.
The content in this article has been prepared by Horizon Bank for general information only and it is not intended to be professional advice. It does not take into account your objectives, financial situation or needs. You should seek your own legal, accounting, financial or other professional advice where appropriate, and consider the relevant Product Disclosure Statement and Terms and Conditions before deciding whether to acquire any products or services offered by Horizon Bank and/or its affiliated partners. We do not recommend any third party products or services referred to in this article unless otherwise stated and we are not liable in relation to them. Any links to third party websites are for your information and we do not endorse any content on those sites. Horizon Credit Union Ltd ABN 66 087 650 173 AFSL and Australian Credit Licence Number 240573 trading as Horizon Bank.