When you’re considering investing or getting a loan, you may be asked whether you want an offset account. So What is an offset account?
An offset account is a type of account that’s linked to your home loan. The money in your offset account “offsets” the money in your home loan, which in turn reduces the interest payable on the loan.
For example, let’s say your home loan is $500,000, and you have $100,000 in your offset account. In this scenario, interest is only charged on $400,000 ($500,000 – $100,000), which can lead to significant savings over the life of the loan.
How Does an Offset Account Work
Having an offset account can make it easier to manage your finances because your savings are offsetting your home loan, which in turn reduces the amount of interest you pay. Additionally, multiple offset accounts can be created, which can further reduce the interest on your home loan.
When setting up an investment loan and offset account, many people choose to have the offset account linked to their owner-occupied property.
This is because the interest charged on the investment loan is tax-deductible for most people, making it beneficial to have this come off their home loan interest.
Another reason people may opt for a mortgage with an offset account is that it can make more economic sense to place additional savings and income into an offset account home loan rather than a savings account.
This is because the savings account rate is typically lower than the home loan rate. By having your money in an offset account, you can reduce your interest and avoid adding to your taxable income through interest earned.
Disadvantages of an Offset Account
An offset account typically comes with a “package fee,” which is charged annually by most banks and usually costs around $390 to $400. This fee adds to the overall expense of the loan.
Additionally, loans with mortgage offset accounts typically have slightly higher interest rates than “basic” variable home loans that banks offer, which can add to the overall expense of the loan.
An alternative to using an offset account is to use the home loan redraw facility. This is essentially the accrued surplus money that is paid over and above the minimum repayments.
This money is often available to owners either at the point of making the over-payments or after the first minimum repayment cycle, though this does vary among lenders.
The benefit from doing this is very similar to the offset philosophy, through reducing the total interest payable on the loan. However, this does require stricter budgeting, and with some lenders, the money you overpay may not be immediately available to you.
Is an Offset Account Right for You?
Deciding whether to have an offset account is a personal decision that depends on your individual circumstances. While an offset account can have benefits, Offset account disadvantages are the typically higher interest rates and annual package fee.
If you don’t have a significant amount of surplus funds, you may find that having an offset account offers reduced value. However, if you have a significant amount of surplus funds or prefer to keep your savings separate from your home loan, an offset account may be a viable option for you. These savings will reduce your home loan interest over time.
In summary, an offset account can be a useful tool for those looking to reduce their home loan interest payments. However, it’s important to consider the potential drawbacks, such as the annual package fee and slightly higher interest rates, before making a decision.
Ultimately, the decision to use an offset account or not will depend on your unique financial circumstances and goals.