Compare home loans with offset accounts from 5.34%

Strategically using an offset account could help you repay your mortgage faster while reducing the sting of home loan interest.

What does it mean to have a home loan with offset account?

Home loan offset accounts operate like a cross between a transaction account and a savings account. But instead of earning interest on the funds kept in a savings account, a borrower can save interest by keeping cash in an offset account.

Meanwhile, they’re generally given a card attached to the account, meaning they can freely spend out of it.

How does a mortgage offset account work?

The balance in the offset account is used to ‘offset’ the outstanding loan amount. Essentially, the lender will act as if the borrower has repaid the funds within the offset account and reduce interest payable accordingly.

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For example, if you have a loan balance of $300,000 and keep $100,000 in an offset account, you might only pay interest on $200,000. That could save a mortgage holder with a 5% p.a. interest rate as much as $5,000 per year in interest.

Or a different analogy: If a library lends you five books but you instantly return one and put it on hold, you’re effectively only borrowing four, even though you can return to collect your fifth book whenever you’d like. Of course, libraries generally don’t charge you to borrow books, but you get the gist.

Contrary to popular misunderstanding, using an offset account won't reduce the size of your regular repayments. However, by minimising interest costs, it could mean more of your regular repayment is going towards paying down the principal balance, thereby shortening the life of your loan.

What about redraw facilities?

Many home loans also come with a redraw facility, which lets you access extra repayments you’ve made on top of the minimum required. Like an offset, extra repayments reduce the loan balance on which interest is calculated.

The key difference between an offset account and a redraw facility is flexibility. Money in an offset account can usually be accessed instantly, while redrawing extra repayments may take a few steps and some lenders place limits on how much or how often you can access those funds. On the other hand, redraw facilities are more widely available and often come with fewer costs, whereas offset accounts commonly attract additional fees.

How to compare home loans with offset accounts

When comparing offset home loans, it helps to look at features such as interest rates, fees, and how much of the account's balance actually minimises interest payable.

Once you're confident in what you need in a mortgage, you can browse home loans with offset accounts on the table above and filter to find the most appropriate low-rate deal.

Interest rate

As with most mortgage journeys, the easiest place to start is by considering the advertised interest rate. The interest rate determines how much interest you'll pay on the funds you're borrowing each year. As a rule of thumb, the lower the rate, the lower the repayments!

Comparison rate

In addition to the interest rate (and often more important) is the comparison rate. It considers the total cost of a $150,000, 25-year home loan, including fees and revert rates, combining expenses into an easy-to-read figure.

Fees

While offset accounts can save a home loan holder interest, many come with additional fees. Some lenders charge borrowers a monthly or annual fee to hold an offset account, and home loan holders should weigh their potential savings against any extra costs.

Full or partial offset account?

Not all offset accounts are made equal. Most - but not all - will consider 100% of the funds kept in an offset account when determining interest payable. It's common enough for a lender to consider just 80% of the funds held in the account, and this could minimise the benefit of the offset.

How much can you save with a mortgage offset account?

How much you can save by strategically using an offset account depends on three factors:

1. Your loan balance

2. How much cash you can deposit

3. The interest rate on your mortgage

Let's assume you have $500,000 outstanding on your home loan, a mortgage interest rate of 5% p.a. with a 30 year term, and $25,000 to deposit.

The table below shows a simple calculation of the interest you would pay with and without an offset account, assuming your offset balance remains the same over the life of your loan. The calculations are made using Your Mortgage's home loan repayment calculator.

Our theoretical borrower would save $73,000 in interest by putting $25,000 in an offset account on day they get their mortgage and keeping it there for the life of your loan.

That figure would blow out to nearly $150,000, wiping more than seven years off their mortgage's life, if they were to grow the balance of their offset account by $250 a month.

Importantly, interest on a home loan - and thereby offset account savings - is typically calculated daily. This means that if you regularly add to your offset account, even if solely to deposit your salary before you spend it, you'll realise some savings.

Pros and cons of having an offset account on a home loan

Advantages of using an offset account

Here are the advantages of using an offset account:

• Interest savings
  The primary advantage of using an offset account is potential interest savings, which can also have flow on benefits.

• Flexible access to funds
  Funds deposited in an offset account remain accessible, allowing you to withdraw or deposit money as needed.

• Repay mortgage faster
  Interest saved by using an offset account is effectively funneled into making additional repayments towards the principal amount, potentially speeding up the process of repaying a mortgage.

• Tax efficiency
  Unlike the interest earned on regular savings accounts, money saved through the use of an offset account isn't taxable income.

Disadvantages of using an offset account

As with anything, there are also downsides to using an offset account.

• Extra costs
  Perhaps the biggest disadvantage of having an offset account is that many lenders demand extra fees for providing them or a higher rate on home loans with offset accounts.

• Need a decent balance
  As mortgages with offset accounts generally cost more than those without, it's important a home loan holder can deposit enough into their offset account to recoup those costs.

• Financial discipline
  If you struggle to save or you tend to dip into your savings regularly, an offset account may not be the most effective option for you.

• Generally not available on fixed rate mortgages
  Typically, offset accounts are only offered on variable rate home loans, but some lenders do provide this feature on fixed rate packages.

Tips to make the most of your offset account

Automate deposits into an offset account

Making regular deposits and keeping the funds in your offset account intact is perhaps the best way to take advantage of your offset account. Consider automating regular deposits to make it easier to stay on track.

Deposit salary into offset account

You can also have your salary credited to your offset account. However, depending on your level of financial discipline, you might be better off avoiding using it for day-to-day transactions, especially if you're prone to spending more than you would like.

Unsure? Seek professional financial advice

Seeking professional advice on managing your money can also be beneficial. A qualified financial advisor or mortgage broker can provide personalised guidance based on your unique circumstances and help you determine if an offset account is the right choice for you. Any fees they charge might be recouped through the savings realised after implementing their advice.