Offset account loan
What is an offset account?
An offset account loan links your savings account to your mortgage. These accounts
allow you to offset your savings, salary and other cash resources against your home
loan. You pay less interest on your loan as you’re only charged interest on the
balance.
For example, if you have a $300,000 mortgage and $10,000 cash on the offset account,
you will only have to pay interest on $290,000 each month. However, since your monthly
repayments are calculated on the original amount, you are effectively paying extra
on your mortgage each month. The additional repayments enable you to clear your
debts faster.
Types of offset
There are two different types of offset accounts to consider: the 100% and the partial.
Most borrowers select the 100% offset as it has become more readily available and
obviously offers a better saving.
100% offset
A 100% offset means the savings or cash in your offset attracts the same interest
rate as that applied to your home loan. For example, if you are charged an 8% interest
rate on your mortgage, then the same interest rate will be credited to any amount
sitting in your offset account.
Partial offset
With partial offset, you only offset at the interest rate applicable on that account,
which by definition is less than the interest rate on your loan.
Using the same example as above, if you have a home loan balance of $300,000 and
have $10,000 deposited in a partial offset account, that money still acts to reduce
the balance on your home loan.
However, the deposit account may only be earning interest of, say 6%. In other words,
you will be paying 8% interest on $290,000 and paying 2% on $10,000. Why only 2%?
This is the loan rate of 8% less the offset rate of 6%.
Advantages of Offset accounts loans
- The interest savings on 100% offset accounts/All-in-one loans are higher than you
would get on other savings and transaction accounts.
- Any money you put in the offset account is deducted from your principal loan balance
(before interest is calculated) – therefore interest is only being
charged on the mortgage amount remaining. This will also help in shortening the
term of your loan.
Considerations - Offset accounts loans
- You may have to pay a slightly higher interest rate or monthly fee to have a 100%
offset account.
- Some lenders may offer this product with a minimum balance, such as $2,000 in the
offset account for the offset effect to be calculated.
- Depending on your circumstances, if you are saving small amounts it is better off
putting it straight into your home loan as a principal reduction.
Offset accounts loans are suitable for
Offset accounts are best for borrowers with large amounts of savings outside their
home loan, which they continually need to access for funds. This product is popular
with self-employed borrowers who tend to have a lot of additional funds to use for
business expenses and wages. This way they can use these business funds to offset
their mortgages and draw out funds when needed. This tends to be a safer option
for this type of borrowers and it is said to be "cleaner for the tax man!"