Offset accounts explained

One frequently asked question in the Australian mortgage broking industry is, "What is a mortgage offset account, and how can it help me?" With numerous options available and the mortgage offset account often highlighted as a significant feature of the loan, it is advantageous to understand how to utilise it to save money and get ahead on your mortgage repayments. Mortgage offset accounts, or home loan offset accounts, may save you money, reduce the time it takes to pay off your loan and help shield you from interest rate rises.

So, how does an offset account work?

A mortgage offset account is essentially a savings account linked to your home loan. It offers all the usual benefits of a standard savings account, such as allowing you to make deposits and withdrawals, providing a debit card connected to the account, and accruing interest. However, unlike a typical savings account, these accounts pay interest at the same rate as your home loan. This rate is usually higher than a regular savings account, making it a means for significant savings on your mortgage.

As the name suggests, the money in your mortgage offset account is deducted from your loan balance daily. For instance, if you have a $200,000 loan and $15,000 in your offset account, you will only be charged interest on $185,000. This can reduce the total interest payable, allowing your monthly mortgage repayments to reduce the loan amount more swiftly.

It will even benefit you if you don't have a lump sum to deposit. By depositing your salary into the offset account each month and using it like a standard account for payments and withdrawals, you can save thousands over the life of your loan. 

An added benefit is that they're completely tax-free. Where you would have to pay income tax on the interest paid on a regular savings account, these accounts carry no such penalties.

What to look for in an offset account

In times of low interest rates, lenders become more competitive by offering some great features to mortgage offset accounts to make their loans more attractive. When we help you look for a loan, we consider the accounts that give you as much flexibility as possible, preferably with the following features:

• No balance limit. If your mortgage offset account has no balance limit, you can use it like a regular savings account to save up as time passes. The more you accumulate in your account, the greater the benefits of savings on your home loan.
• An account where 100% of your balance is offset against your loan, calculated daily. This will afford you the maximum financial benefit in terms of savings against your loan. Some accounts only calculate on the lowest or average monthly balance, so it's important to get an account that calculates savings when the balance is also high.
• An equal interest rate to your mortgage. This is a common feature of most mortgage offset accounts, but ensuring the rate will move with your home loan is wise, again ensuring maximum savings. It's particularly important because any interest earned from the money in your offset account will also offset your mortgage interest, helping you pay off the loan principal faster.
• A credit card with a low interest rate. Mortgage offset accounts often offer credit cards with a much lower interest rate than regular ones. This can be particularly useful when setting up your home or if you're doing renovations.

How does it help to cut down on the term of my loan?

Typically, your monthly loan repayment consists of a portion for interest and a portion for the principal. When you have a mortgage offset account, the balance is deducted from the loan, resulting in a reduced amount of interest you pay each month. Therefore, if your mortgage repayment remains unchanged, you are effectively paying off more of the principal, which allows you to reduce the loan more quickly.

Here's an example (calculated on a 3.72% interest rate).

Let's just say you have a home loan of $400,000 over 30 years. With a mortgage offset account containing a balance of $5,000 for the life of the loan plus a regular monthly offset account deposit of $250, it would save you $65,072 in interest repayments plus 6 years and 4 months on the loan term.

Obviously, the more money you have in your offset account, the more you will save and the quicker you will pay off your loan. What's more, your mortgage offset account will give you the additional flexibility of having money on hand if needed.

How do I find the right loan with the right offset account?

With low Australian interest rates, many lenders offer great mortgage offset accounts to make their loan products more attractive. There are hundreds of loan products on the market, tailored to various uses. You can get loans with mortgage offset accounts for regular home loans, property investment loans, and even construction and renovation purposes.

That's where we come in. We can pick and choose with access to a wide variety of lenders. We do all the legwork to find the right product for your needs and personal financial circumstances. To learn more about our home loan solutions, enquire online or call 1300 661 991 for a chat.

PS: If you're in need of some extra cash to cover related expenses such as removalist costs, lawyers fees, insurance, new appliances etc, we offer cash loans $1,000 - $5,000. The application process is quick and easy - so apply online today!

Apply now

Related articles