100% offset PLUS fixed rate - How much can I save?

By Nila Sweeney
Q. Well now it all makes sense. I’ve never really understood just how cost effective this type of loan could be. I have a fixed loan of \$350,000 with a major bank at 8.55% pa (which will revert to 8.77% variable). I also have \$10,000 in a term deposit account with them. If I combine these two using a 100% offset loan with a fixed rate, can you estimate how much I can save over the term of the loan?

A. Please bear in mind that the figures provided are for information purposes only. There are other costs/fees to consider when seeking a more concise comparison such as exit fees, legal costs, etc.

For the purpose of this exercise, I’ll assume that your rate remains 8.55% and doesn’t revert to a higher variable rate.

Currently you have a loan of \$350,000 at 8.55% pa. Assuming this is a principal and interest loan over a 30-year loan term, the total cost of your loan over that time would amount to \$973,300, of which \$623,300 is interest charged.

If you were to apply your \$10,000 term deposit to an offset account (and let’s assume this balance remains for the term of the loan), the total cost of your loan over that time would amount to \$871,988, of which \$521,988 is interest charged.

In summary:
• You would save \$101,312 in interest over the term of the loan.
• You would reduce your loan term from 30 years to 26 years and seven months.
• In the offset account, you ‘earn’ interest at 8.55% pa (loan interest rate) which equates to \$855 pa. As it’s offset against your loan account, there’s no need to declare this at the end of the financial year.
• In a fixed term account at say 5% pa, you earn \$500 pa and are required to declare this amount at tax time.