What Is an Offset Account and How to Leverage One

Investing

Tips & Tricks

7th Sep, 2021 | Few mins to read

You may have heard the term offset account before and wondered if this could be a good option for you. With property prices at an all time high, a home loan can seem like a daunting prospect, but there are a few ways to make it more manageable. One option is an offset account.

What is an offset account?

An offset account works alongside your home loan, similar to your regular savings or transaction account, but tied to your loan in order to help you pay it off faster, as well as reduce the overall interest paid. It is popular with people looking to pay their home loan off sooner or those who are investing in more than one property.

How does it work?

By having the account tied to your home loan, an offset account reduces the home loan’s interest, allowing you to pay it off sooner. For example, if you have a 100% offset account with $50,000 attached to a home loan of $400,000, you are only charged interest on $350,000. You can use the account like any other, depositing money and withdrawing as needed, but the more you have in there, the more the interest on your home loan will be reduced. This is why most people treat an offset account as a savings account.

The two types of offset accounts

Full Offset Account

Offsets 100% of the balance within the offset account against the mortgage, reducing interest accordingly. This is the most common type of offset account.

Partial Offset Account

Typically offsets 40 – 50% of the balance of your offset account against the mortgage. This is mostly when offsetting against a fixed rate home loan.

Is it worth it?

There are lots of pros and cons to having an offset account and it ultimately comes down to your unique scenario.
The following are the main benefits and disadvantages to keep in mind:

Cons

A loan with an offset account can incur higher fees (monthly or annually).
You may need to pay higher interest rates to get a home loan with an offset account attached.
An offset account does not change your repayments, just your overall interest paid.

Pros

The money saved by reducing interest paid is tax free.
100% offset accounts mean that every dollar you put in saves you even more money.
You can redraw on the amount that’s in your offset account without being charged a fee.
An offset account can be used in the same way as any other transactions account.
You can pay your home loan off faster and pay less in the long term.

Other ways to save

An offset account can be a great option but it isn’t the only one if you want to save on your home loan or repay it faster. Some other ways to reduce interest or get a better home loan offering include:

Refinancing with another institution to get a better interest rate.
Continuing to make the same repayment amount even when interest goes down.
Pay fortnightly instead of monthly, you will be paying an extra monthly repayment each year.

At the end of the day, it’s important to weigh up your options to see if an offset account could be a good fit for you. For property advice or more information, talk to the Offset Property team today.