What is an offset account?
A 100% Offset transaction account can be a great tool to help you save interest on your home loan. Depending on your lender, it can work just like any other bank account with money coming in and money going out.
Like a normal transaction account, you can deposit and withdraw funds from your offset account whenever you like via eftpos, atm, internet banking or visiting a branch. However, because it is linked to your home loan, it can help you reduce the amount of interest you incur on your loan.
How can an offset account help me to save interest on my home loan?
The main difference between an offset account and a savings account is that instead of earning interest on money sitting in a transaction account, you save interest at the rate you’re paying on the loan it is linked to.
This works to your advantage as the interest rate you pay on your home loan is generally higher than the rate you earn on a savings account. This means that for no additional risk, you can save more interest that you could earn, as per the following example.
An example
If your $500,000 home loan was linked to a 100% offset account containing $50,000 cash, the lender will only charge you interest on the net debt you owe i.e. $450,000.
Since interest is calculated on a daily basis, to gain the most benefit, you should try to leave as much cash as possible in your offset account for as long as possible.
If we take this further, let’s say your home loan has an interest rate of 5%p.a, with the rate on a savings account being 1.5%p.a.
Over one year, you could earn $750 in interest with your $50,000 in a savings account.
However, if this was offset against your home loan instead, you could potentially save $2,500 in interest over the same year.
In this example, you are not only $1750 ahead, but since you haven’t ‘earned’ any interest, there is no reportable interest income.
An offset account can also work to your advantage if you plan to make your current home an investment property in due course.
100% Offset Account Linked to your Home Loan
Maximising the interest savings
Since interest is incurred on a daily basis, the longer you keep money in your offset account, the more interest you can save.
Many clients like to use a credit card to pay for all their expenses and then pay this bill off in full at the end of the month. This way, you end up keeping more money in your offset account for longer which helps to reduce the overall interest incurred on your home loan.
If you don’t have an offset account attached to your home loan, or you want to make sure you’re maximising the benefit, we can help.
*Please note this general information is provided as a guide only. You will need to refer to the PDS provided by your specific lender to ascertain specific information about any specific accounts offered by lenders.
