Offset Account
Home Loan borrowers seeking intelligent strategies to manage mortgage repayments can get a home loan with an offset account. This personal transaction account linked to your mortgage provides a savvy way to reduce the interest paid on your principal loan. And for many who purchase investment properties they may be given advice from their advisor that this is a smart option, so please get licensed appropriate advice.
Should every mortgage holder opt for an offset account? Even though it could be a great way to “offset” your interest rates, every offset account would require a hefty sum of funds to have an impact on reducing your mortgage repayments.
Let’s discuss what an offset account is and how it works, its significant advantages, and the top considerations before getting an offset account feature on your home loan.
What is an Offset Account?
An offset account is a specialized savings or transaction account operated with a home loan. The offset account is purposely linked to your mortgage, and the balance in your account is offset against the outstanding loan balance.
Funds held in your offset account can be used monthly to reduce your overall payments because the home loan principal and interest payable is calculated on the loan balance minus the funds held in the offset account.
Lenders generally offer a 100% offset account as a feature on either fixed-rate or standard variable home loans, with very few offering a partial offset feature.
What’s great about an offset account is it functions like a savings account, giving you easy access to your deposited funds whenever needed. Most offset accounts come with a debit card to make transactions convenient.
How does an offset account work?
Let’s consider a simple example to illustrate how an offset account works:
Assume you have a home loan with an outstanding balance of $300,000 and an offset account with a balance of $50,000. With an offset account, the lender will calculate the interest charged on your home loan by deducting the balance of the offset account from the loan principal.
Traditional Home Loan Interest Calculation: $300,000 (Loan Balance) x 4% (Interest Rate) = $12,000 per annum in interest
Home Loan with Offset Account Interest Calculation: ($300,000 – $50,000) (Loan Balance – Offset Account Balance) x 4% (Interest Rate) = $10,000 per annum in interest
In this example, the offset account saves the homeowner $2,000 in interest per year. The funds in the offset account continue to be accessible to the account holder for daily transactions, just like any regular savings or transaction account.
The key here is to maintain the offset account balance high to reduce monthly repayments significantly. If you’re making a withdrawal, that results to less money offsetting the interest rate on your home loan.
Why use an offset account?
Suppose you are a mortgage holder who has a chunk of funds saved and could be left untouched. In that case, you can benefit from an offset account in these ways:
Reduce the interest – The primary advantage of an offset account is the potential to save on interest costs over the life of the loan. Homeowners can shorten the loan term or reduce their monthly repayments by reducing the outstanding loan balance.
Cash flexibility – An offset account allows homeowners to retain liquidity and easy access to their savings while enjoying the benefits of interest savings on their home loan.
Pay off debt sooner – By directing surplus funds into the offset account, homeowners can accelerate their debt repayment without incurring additional fees or penalties.
Tax efficiency – Unlike traditional savings accounts, the interest earned on an offset account is not subject to tax, providing an additional advantage for borrowers.
Taxable calculations for capital gains tax on proceeds from property sale – Again as mentioned earlier you need specific licensed advice from an appropriately licensed accountant or financial advisor. That said, because minimum balances are calculated differently for home loan/ mortgages that had offset accounts versus redraw, it may have a significant impact on taxes in future when properties-Investment are sold.
What are the drawbacks of using an offset account?
An offset account requires you to maintain a chunk of your funds in the account, which may not be ideal for every mortgage holder. Here are other drawbacks you may experience:
Higher interest rates – Offset features in mortgage products usually come with slightly higher rates than those without them.
Minimum balance requirements – Maintaining an offset account may be too costly for some home buyers because of the minimum balance that must be retained.
Ongoing account fees – Some lenders charge additional fees for maintaining the offset account, including account and transaction fees. These add to your home loan cost overall.
How is an offset account different from a redraw facility?
An offset and a redraw feature can help clients make strides on mortgage repayments, but there are significant differences in how each works.
While an offset account uses a separate savings account to subtract or offset the loan balance when computing for the interest, a redraw facility allows borrowers to make extra repayments over and above the minimum and re-withdraw these funds when needed.
A redraw facility essentially pays the funds to the lender, and you are required to request the redraw when you need to access those funds. Furthermore, the lender sets a cap on how much of these extra funds you can redraw – because they calculate what would be a doable repayment amount given the loan term that you have.
Perhaps the big advantage of an offset account is that it is still your own money in that savings account, funds that you are not “giving” to the lender. With a redraw, you are requesting to get back a portion of your repaid funds. Your offset feature offers more flexibility and accessibility, just like any regular savings account.
Finally, the use of offset accounts vs. redraw has to be reviewed when applied to an owner-occupier home instead of an investment property, please be sure to get advice from a loan professional.
Keep in mind that home loans with an offset account tend to have higher interest rates than those without, or with a redraw option instead.
Offset account questions?
Home buyers can maximize savings or extra funds by placing them in an offset account. It’s a great option to reduce interest costs and potentially lower the interest rates calculated on the home loan. At the same time, you still have the ability to utilize your funds for other purposes should you need to withdraw them.
Comparing different loan options across the market can be tedious; let Intellichoice help you make an informed decision about which offset account offer aligns with your financial strategy.
Please give us a call or fill out our appointment form today to get started.
