Having an offset account may help you to pay off your home loan faster and save you thousands of dollars in repayments, but how exactly do they work? Are they worth it? Here we explain.
What is an offset account?
An offset account is an account linked to your home loan that operates like a transaction or savings account. It’s an account that offsets the balance in that account against the balance of your home loan, so you'll only be charged interest on the difference.
Having an offset account may help you to pay off your home loan ahead of its term and save thousands of dollars over the life of the loan, simply by depositing all your regular income and earnings into your offset account. However, these accounts tend to come with higher costs, so it’s important to crunch the numbers to ensure you’re ahead in the long run.
How an offset account works
Say you have a home loan balance of $400,000 and savings of $20,000. If you keep the $20,000 in an offset account, the interest on your home loan will only be charged on $380,000, not $400,000. You won’t earn interest on the $20,000 in the offset account; instead, that $20,000 is offsetting the interest charged on your home loan.
Even though you typically don’t earn interest with an offset account, your money is still working hard for you. The point of an offset account is to reduce the amount of borrowed money on which you are paying interest and to shorten the lifetime of your loan.
Like a regular transaction or savings account, your money is still accessible in the offset account. However, if you make a withdrawal, you will have less money working to lower the interest charges on your home loan.
How much could you save?
The more money you have in your offset account, the more you could save on interest payments for your home loan, which will likely make your home loan term shorter.
Samantha borrowed $325,000 with an interest rate of 5.20% pa over 30 years to buy her first home. She opted for a loan with an offset account, because she wanted to find a way to save money over the life of her loan. She deposited $2,500 into her offset account, which means she only pays interest on $322,500. In doing so, Samantha shaved five months off her loan and will save $9,213.90 in interest payments if her repayment amount remains unchanged over the term of the loan.
If Samantha deposited an additional $100 to her offset account each month, she would save almost $50,000 in interest, and shave 2 years and 3 months off the length of her loan.
This case study is illustrative only and is not an estimate of the investment returns you will receive or fees and costs you may incur. This case study is based on the following assumptions a) loan size of $325,000 b) interest rate of 5.20% pa for the entire life of the loan c) loan term of 30 years d) repayments are principle and interest and the loan is fully repaid over 30 years e) repayments are made monthly.
Types of offsets
100% offset account - 100% or ‘full’ offset accounts use every dollar in your offset account to offset the balance in your home loan account. These are typically available for variable-rate home loans.
Partial offset account - as the name suggests, only part of the balance is used to offset your loan. These types of accounts may be available for certain fixed-rate loans. For example, if you had a 40% partial offset account, with a loan balance of $200,000 and savings of $20,000, you would offset $8,000 from your loan balance (40% x $20,000) and pay interest on $192,000.
The pros and cons of offset accounts
|Reduce the length of your loan - by reducing the loan balance you are
charged interest on, but keeping your interest repayments the same as before,
you can pay off your home loan faster.
|Relatively higher fees - having an offset account could come
with additional fees, so be sure to understand the costs.
|Save on interest repayments - the higher the balance in your
offset account, the more you can save on interest repayments for your home
|Relatively higher interest rates - the interest rate for home loans with
an offset account are typically higher. Crunch the numbers to make sure it’s right for you.
|Potential tax benefits - because the money in your
offset account doesn’t earn interest, it’s not considered taxable income.
|A large deposit - in some cases, for an offset account to be
worthwhile given the additional costs, you need a substantial balance in the
|Flexibility - you have unrestricted access to the money in
your offset account.
|Financial discipline required - if you make a habit of regularly
withdrawing from the offset account, you’re unlikely to enjoy the benefits of
3 biggest household expensesRead more
5 life insurance questions you’ve always wanted to askRead more
Tips for when you land your first full-time jobRead more
14 money mistakes to avoid in your younger yearsRead more
7 considerations when choosing a school for your kidsRead more
10 financial considerations before you take a career breakRead more
This information is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling 13 30 30, before deciding what’s right for you. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.
All information on this website is subject to change without notice. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability for any resulting loss or damage of the reader or any other person.