Guide To Offset Accounts

An offset account functions in the same way as a day-to-day bank account, the only difference being that it is tied to your mortgage. Like any regular bank account, you can have your wages paid directly into the offset and organise to direct debit bills from this account. And, upon opening your offset account, you’ll receive a debit card for easy accessibility. Yet, it has more utility than your everyday savings account.

As you engage with this account, you will be simultaneously ‘offsetting’ the daily home loan principle against the account’s balance. This thereby reduces the interest you pay on your mortgage in the long term. For example, if you have a loan of $700,000 and are keeping $50,000 in your ‘full’ offset account, you will only be charged interest on $650,000 for that day. The more you keep in the offset account, the more you can save on your loan payments.

You are more likely to find variable rate loans with the offset account feature; fixed rate loan offset accounts are less common. If you do find a fixed rate loan with an offset, it may be ‘partial’ or require you to pay higher fees. If you have a split rate loan, it might be possible to open an offset account for the variable portion of the loan; however, this will depend on your lender.

There are two types of offset accounts:

1. Full offset accounts: This option allows you to offset your home loan principle against 100% of the money in the account. Therefore, it is typically in your best interest to maintain a high account balance.

Or

2. Partial offset accounts: This option restricts its benefits to a portion of the money in your account. Continuing the previous example, a partial offset may instead use 25% of your $50,000 account balance. Therefore, your $700,000 home loan principle will be offset by $12,500 – and you will only pay interest on $687,500.

• Increased savings: By reducing the amount of interest you are charged; you are likely to save money over the course of your loan.
• Reduced loan term: Minimising the interest paid whilst maintaining your repayments may enable you to repay your loan faster.
• Tax avoidance: As an offset account does not accrue interest, you cannot be taxed on the money in this account, as you would with a regular savings account.
• Accessibility and flexibility: An offset account has all the benefits of a regular savings account (minus this interest) – meaning you can easily access any money you deposit in this account.

• Account fees: Some offset accounts are accompanied by management fees.
• Higher interest rates: It’s possible that mortgages with an offset account feature will have higher interest rates attached.
• Account balance requirements: To justify the account fees and higher interest rates, you may need to maintain a large balance in your offset account. This may not be an option for all homeowners.

The aim with these accounts is for them to hold as much money as possible, for as long as possible. Three ways to maximise the benefits of your offset account are to:

1. Receive your salary into the account,
2. Deposit your savings in the account, and if you’re savvy
3. Utilise your credit card to defer daily expenses and maintain your offset account balance.

Note that these suggestions might not work for everyone. It is best to speak with your lender or mortgage broker directly if you want to know how you can make better use of your offset account. Frequent loan check-ups may also ensure you are getting the best from your loan and its features.

Most Australian banks offer offset accounts in some shape or form, whether it be full or partial, on variable or fixed loans. It is up to you to carry out the necessary research to determine what type of offset account you want, and to then find a lender that meets these needs.

Using a mortgage broker may simplify this process as brokers typically have a network of lenders and can easily narrow down each one’s offerings. Any financial decisions you make should be well-researched and supported by a professional. Just make sure your broker offers a wide range of loans: be wary of those offering a limited selection of products they are being compensated to recommend over others.

It is common for lenders to charge a monthly or yearly fee on their offset accounts. While this will vary by lender, you can expect to pay around $200-$400 annually for some of these accounts (this figure may also include all your loan’s account keeping fees). On the other hand, some lenders may not charge any fees on your offset account. In place of this, they might instead factor account management expenses into their offered interest rate.

Given the variation in offset account expenses, it is worthwhile considering offset features before entering a loan. Conduct your own research or get in contact with a mortgage broker for further information, if necessary.