It is common for homeowners to feel like their home loan won’t ever come to an end. One of the steps you can take to help pay off your home loan faster is to set up a home loan offset account. In this article, we explain the different types of offset accounts, how they work, and how they might benefit you.
Put simply, a home loan offset account is a type of savings or transaction account that is directly linked to your home loan and is designed to help you reduce the interest charged on your home loan.
(Outstanding loan amount - Funds in offset account) = Loan amount on which interest is charged
Since home loan interest is calculated daily by lenders, the money in this account is used to offset your home loan balance. Meaning, if you owe $400,000 on your loan and you have $20,000 in your offset account, you will only be charged interest on a loan of $380,000.
While an offset account will reduce the amount of interest you are charged, the cash is not actually removed from your account. Your offset account retains the balance so that you have the flexibility to use it to, for example, pay bills.
The more money sitting in your offset account, the less interest you will pay. Offset accounts allow you to use cash you have saved, or reserved for living expenses, to reduce your home loan interest. As a result of using an offset account, you can pay less interest in the long run.
The money sitting in the account poses as an ‘offset’ against the balance of your home loan. Depending on which type of offset account you choose to open, the money within the offset account is then deducted from the principal remaining on the home loan, before the daily interest is calculated.
For example, if you have a $500,000 loan and $20,000 in your offset account, you’ll only pay interest on your home loan based on a balance of $480,000 ($500,000 - $20,000) for that day.
If the next day you pay a bill for $1,000 and have a balance of $19,000 in your offset account, your interest on the home loan will be based on $481,000 ($500,000 - $19,000).
While this may not seem like much, this could help you save a significant amount of money by reducing the interest expense of your home loan over the life of the loan.
Use our handy offset account calculator to find out how much you could save with an offset account.
Yes, lenders typically charge an annual fee for a home loan offset account. Some lenders will charge up to $400 per year, so it is a good idea to make sure that the amount you will save in interest each year is larger than the annual fee.
Looking for a home loan with a free offset account? Our Home Loan Specialists can negotiate with lenders to get you a better deal. Chat to an expert today.
Technically, anyone can apply for an offset account. Many families with dual incomes and a high monthly expense tend to benefit the most from offset accounts because it helps them with their day to day funds. Still, anybody who consistently deposits into the account and is able to maintain a positive balance in that account will benefit from having an offset account.
This decision is entirely up to you. If you want to reduce the total size of your loan, you could pay the loan off directly. But, if you need to be more flexible with your money, placing your funds into your offset account could be better suited to your lifestyle and personal situation.
There are two different types of home loan offset accounts. They include:
100% offset accounts : This type of offset account is most commonly used as it can greatly assist in reducing the amount of interest in a home loan. This is where 100% of the balance within the offset account is deducted from the principal of a loan.
Partial offset accounts: This is a type of offset account where only a partial amount (usually 40%) of the balance is taken away and used against the principal of the loan.
Both offset accounts work to your benefit and can help you shave months or years off your home loan depending on the balances you keep in the offset account. The 100% offset account type is more commonly used as it has a greater effect in reducing the length of your home loan.
If you’re interested in exploring your options, talk to your lender or a Lendi Home Loan Specialist today to get started.
Yes, you can usually get an offset account with an investment property loan. Out of everyone, it may seem like those with investment properties get the most out of an offset account.
Withdrawals and deposits can be made without the investment loan being affected.
If you use a redraw for an investment loan, you risk changing the purpose of the loan. This risk does not exist when you use an offset account to hold excess funds rather than paying the loan down and using a redraw to access the funds.
All in all, a home loan offset account may be suitable for most borrowers, regardless of if you’re a property investor or not.