Navigating which home loan is right for you can feel like an overwhelming responsibility. Especially as a first home buyer, learning about all your options and weighing them up can be a tricky task to wrap your head around.
We’ve simplified one home loan feature – offset accounts – and answered your frequently asked questions to alleviate some of that stress.
An offset account is a savings account or an everyday account which is linked to your home loan account. It works to ‘offset’ your home loan balance daily, meaning you are only paying interest on the difference between your principal loan and the balance in your offset account.
You can offset your loan 100% with your transaction or savings account. The offset account can either be linked to a variable rate loan – which is more common – or a fixed-rate loan.
For example, if you have a home loan balance of $250,000 and you have $40,000 in your offset account, you will only be paying interest for a home loan balance of $210,000.
With a smaller amount to charge interest on, you could save thousands as you pay off your home loan.
As mentioned above, interest is only charged on the difference between your principal home loan and the balance in your offset account.
Here is an example to better explain how this benefit would play out over time. The variable interest rate in this hypothetical is 4.77% against a $300,000 home loan.
Unfortunately, you won’t see the benefits of an offset account in your monthly repayments, as you can see above. But, because of the savings made by reducing your interest, this means you will repay your home loan off at a faster rate.
This is generally dependent on how much you “offset” your home loan, your variable interest rate and your principal loan amount.
For instance, let’s say you have $10,000 in your offset account for the life of your loan and you borrowed $320,000 at 7% over 25-years. Over the lifetime of your loan, you’d save yourself $46,000 and you’d shave 18-months off your loan term.
Redraw facilities and offsets accounts are both common features of a home loan that help reduce the amount of interest you pay. However, there are a few key differences to keep in mind when deliberating between the two.
No – the point of an offset account is to reduce the amount of borrowed money on which you are paying interest and to shorten the lifetime of your loan.
Even a relatively small sum of money in an offset account could shed years off a home loan. And, while you are minimising the interest you pay, you can quickly gain access to your savings should you need them.
Along with this, offset accounts are generally straight forward and easy to manage. You can link your pay-check up to your offset account and be unaware of the savings being made.
With such a wide range of products and features available to be tacked on, it is likely you will have more than one route to help you make the most out of your home loan. Offset account aren’t for everyone and with the benefits you will find some negatives.
It is now easy to add features to a fixed loan. Whether it be a 100% offset, partial offset, a redraw facility or the chance to make additional repayments, there are options available. Some loans may give restrictions on how long the offset may last though, for example you might only be allowed to have a 100% offset for a year on your particular fixed rate loan.
It depends. Generally, lenders will only allow you to link one offset account to one loan. You might find a lender who will allow you to have multiple offset accounts, but this will be harder to track down.
If you decide you want more than one offset this can be achieved by splitting your variable rate loan in two, then linking each loan to each offset account. The same goes for more than two offset accounts.
So, if you had a home loan of $400,000 and split this loan into two $200,000 sums, you can have one $200,000 loan linked to one offset account with $10,000 and another linked to an offset account that has $20,000 saved.
The total you will be charged on would be $200,000 + $200,000 – $10,000 – $20,000 = $370,000.
Yes, you can. Unlike a redraw facility, you can immediately access your savings in an offset account.
When selecting a home loan to pair up with an offset account, here are some features to keep in mind:
Words by Michelle Elias
A professional mortgage broker at eChoice can help you determine whether an offset account is the best route for you. Chances are you will have a few options to weigh up.