Been doing some home loan research, and not sure what an offset account is or whether you should have one or not? You're confused because it's been made that way. Confusing. We explain, in a friendlier way, below.
A silly name for a savings account that’s connected to your home loan. When your lender works out how much interest to charge you, any money in this account (such as the money you’re saving for a holiday) is taken off your home loan principal balance. It’s like paying off your home loan, without actually paying it off. So you can still go on your holiday.
How it works.
It works like any other savings account, with a card to pay for things or withdraw cash, from that account. Plus all the other things you’d expect, such as online banking, statements and annoying marketing emails.
But there is a special added bonus feature prize: it’s linked to your home loan, so the balance of money in your offset account is taken away from your home loan balance when your interest is calculated.
You’re free to spend or withdraw that $50,000 whenever you like. But more money in your offset account, mean less interest charged.
Money and time.
If you have savings, an offset account will save you money in interest charges over the life of your loan – and potentially a lot, if you have a considerable amount of savings. And because you’re paying less interest, you’ll pay off your loan faster too.
For example, if you have a $500,000 loan, at an interest rate of 4.5%, you’re likely to pay $412,000 in interest charges over a 30 year loan term. If you have $50,000 steadily in an offset account over that 30 years, you’ll save about $42,000 in interest charges, which will reduce your loan term too.
Just because you’re paying less interest, doesn’t mean your loan repayments will go down. You’ll have the same home loan repayment, but more of that amount will be going towards paying down the principal loan balance, and less going towards interest.
The minor catch.
There is usually a cost involved in having an offset account, which may be a monthly fee or it could be built into the interest rate. Make sure you know what it’s going to cost you before you make your decision, so you won’t have any reason to get surprised or offset. We were waiting paragraphs to say that.
Did you know fixed rates and offset accounts are a match made in heaven? Learn more.