Wondering what an offset account is and the benefits that it comes with?
If you have a home loan or are planning on becoming a homeowner an offset account can help reduce the amount of interest you pay and the term of your loan.
Read on to understand what an offset account is, how it works and what features it comes with so you can decide if it's right for your circumstances and how you manage your finances.
An offset account is a dedicated, everyday transaction account linked to your home loan or mortgage. The money in that account will "offset," or reduce, the total balance remaining on your home loan.
This reduces the interest you have to pay and means you will be paying off a larger portion of your home loan every month, which shortens the length or term of the loan.
An offset account works like an everyday transaction account. You can deposit your salary and savings into it, but you only pay interest on the difference between your home loan balance and the money in your offset account. Essentially, the more you keep in your offset account, the more you'll benefit from paying reduced interest.
You don’t actually earn interest in an offset account, but the money is still working for you by reducing the balance - and interest payable - on your home loan. Note that offset accounts are usually exclusively linked to a variable rate home loan, so you will not be able to get this feature with a fixed rate mortgage.
Let’s see how an offset account works with this simplified example.
Example: Let's say you've taken out a $600,000 home loan at an interest rate of 3%.
In this case, your monthly repayments would be $2,530.
If you put $20,000 into your offset account, though, the balance on your mortgage would reduce to $580,000. ($600,000 - $20,000 = $580,000).
With the interest calculated on your new balance, your monthly repayment would now be $2,446, a saving of $84 per month.
There are two types of offset accounts available on the market:
Partial offset accounts, where only a portion of the balance in your offset account is counted against your home loan.
100% or full offset account, where the entire balance of the home loan is offset by the funds in your offset account.
Like any financial product, you need a balanced view of an offset account so you can decide if they are right for you.
To allow you to make an informed decision, here are some upsides and downsides of having an offset account.
Open an offset account linked to your mortgage or home loan and it will help:
You should also be aware of the following downsides to an offset account:
You may also be wondering how an offset account differs from a redraw facility.
An offset account and a redraw facility are both account features linked to a variable rate loan, but what they enable you to do is very different.
An offset account is like an everyday transaction account that is linked to your home loan account, with more flexibility and easy access to your cash.
A redraw facility is not a transaction account, but you can make additional repayments to your home loan, and withdraw them at a later date if you need the money. Both features can help reduce the amount of interest you pay on your home loan, but they each may suit different needs.
You should now be in a position to decide if an offset account suits your circumstances, and how you manage your finances.
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