Offset account is basically a bank account that is linked to a person’s home loan. Any money put into an offset account will reduce the interest payable on the home loan. Offset accounts come in two types: 100 percent offset account and partial offset account. Any money put into a 100% offset account will reduce the loan balance when interest is calculated. This means you pay a little less.
For example, if you put a $1,000 in your offset account, your loan balance will be reduced by $1,000 when your lender works out how much interest is due. The more you put in, the more savings you get since more of your loan repayment will be going towards your loan balance and not just interest.
Partial offset accounts work in a similar manner, but they only offset a part of the loan balance. For example, if you put a $1,000 into a 40 percent offset account, your loan balance will only be reduced by $400.
Mortgage customers usually tuck cash into their offset accounts to reduce the interest payments on the loan. Serious discipline is required when you’re reducing the interest on a home loan with the help of an offset account.
Many borrowers put any extra money they have into their offset account to help speed up repayments. Some even get their entire salary deposited into an offset account. Then, they just pay for their bills and other expenses with a transaction card linked to their account.
Customers who don’t have a large amount of money in their offset account should not dip into the deposits in the account. The transaction card linked with the offset account should be kept away to ensure that these funds are not used for expenses. Calculations show that if a particular customer with a 30-year home loan of $300,000 had a total $10,000 in their offset account, they will be able to save over $20,000 over the thirty-year loan term.
Moreover, the length of their loan will be reduced by a year and five months. The calculations are for a home loan with a 4.44% standard variable rate.
There are two important things you must check with the offset accounts. First, carefully look at the interest rate. If the lender is offering this feature, they may charge a higher interest rate. Secondly, you should check if there are any monthly fees associated with offset accounts as these may outweigh any potential interest savings.
Most lenders require borrowers to become a part of their professional package to acquire an offset account. The professional package may require a borrower to pay a fee of $400 every year. Since the interest rates on home are near four percent, it means that a borrower would be required to have a minimum offset balance of around $10,000 to pay the professional package’s annual fee.
This means that offset accounts are a good option for borrowers who generally have a handsome amount of money in their accounts. Some people who have a redraw facility on their home loan don’t really need an offset account. Redraw facility allows a home loan customer to put extra money into the home loan that can be accessed whenever they want. This works fine for people who are disciplined. However, the redraw facility won’t be useful for people who can’t resist the temptation of dipping into the money in their redraw account.
If you wish to determine whether you’ll be better off with money in an offset account or savings account, you should focus on the numbers. For example, if you put $10,000 in your offset account from the first day of a home loan of $300,000 with a 4.44% interest rate and don’t touch that money for a whole year, you’ll save $453 in the loan’s first year. Imagine how much you can save over the term of the loan.
In comparison, at 2.19% interest on a $10,000 deposit in a savings account, you would be able to save $216. This means that the offset account is a better option for you if you can deposit a large amount of money in your offset account.
If you can’t deposit a large amount of money in your offset account or have to dip into the funds in the offset account for your expenses, then you won’t be able to reduce interest significantly.
Home loans with offset accounts, low rates and monthly fees do exist, so make sure to compare loans to find them. Speak to a financial advisor to determine the best way to use an offset account for your individual situation. At Josh Financial Services, we can offer you understand about offset accounts and help you get the right offset account that meets your needs.