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A Beginner’s Guide to Having an Offset Account
●March 10, 2021●6 minute read
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If you have recently purchased a home and are looking for ways to save on your loan, you may wish to consider an offset account. An offset account could potentially reduce the amount of interest you pay on your loan and help you pay it off sooner.
What is an offset account?
An offset account is a transaction account that is linked to your home loan. You can make deposits to or withdraw from this account and the balance is ‘offset’ against the amount owing on your home loan.
Holding money in an offset account over a set period of time can reduce your interest charged because the lender is not charging you interest on the full balance of your loan.
How does an offset account work?
In order to most clearly understand how an offset account works, let’s look at a hypothetical example. Let’s say that you have purchased a home with a loan for $400,000, so you owe the bank a balance of $400,000. If you have $50,000 in a linked offset account, you will only need to pay interest on $350,000 of your balance.
Another example to understand how it can reduce the life of your loan may be helpful. In this example, you purchased a home for $500,000 and have $10,000 in an offset account linked to your 25-year mortgage. With an average interest rate of 7.22% p.a. over the life of your loan, you would save $46,319 and pay off your loan 13 months early.
Because the offset account works just like a regular savings account, the money is accessible to you whenever you need it. You can withdraw and deposit into your account whenever you need to.
These examples suggest a 100% offset account, but there is another type of offset account: a partial offset account. These two types of offset accounts function slightly differently. 100% offset accounts operate so that the interest payable on the mortgage is offset by the total amount in the account. A partial offset account will only offset a portion of the amount in the account; for example, if you had a loan of $400,000 and $50,000 in the linked 50% offset account, you would only pay interest on $375,000 of your balance.
Is an offset account worth it?
With all of this said, it may be difficult to see any disadvantages of having an offset account. However, there are things you should consider before deciding on a home loan with a linked offset account.
Most lenders will charge fees for an offset account, so it may be worth considering whether the interest you would save is more than what you will be charged. So, essentially, it will depend on how much you wish to put in the account and whether you will need to regularly withdraw from the account.
If you are going to use it to regularly access money, it may not be the right choice for you. To clearly outline the pros and cons of an offset account, the advantages and disadvantages have been discussed below.
Offset account advantages
- Pay less interest on your home loan: You can effectively cut years from the life of your loan and pay thousands of dollars less in interest. With a 100% offset account, every dollar in the account is saving you interest on your loan.
- Your savings do more for you: Savings accounts usually accompany lower interest rates than your home loan. So, your savings may actually work harder for you in an offset account compared to a regular savings account. Additionally, the interest you save will not be taxed by the Australian Tax Office (ATO). Comparatively, the interest earned on a savings account is taxed.
- You have extra funds at hand: You can keep excess funds available while still minimising your interest payments on your mortgage. In this way, if your situation changes or you need money urgently, you can easily access the money in your offset account
Offset account disadvantages
- You may have higher fees: You may end up paying an additional fee for your loan with an offset account.
- You may have a higher interest rate: You could end up paying a higher interest rate on your mortgage with a linked offset account.
Offset account vs a redraw facility
An offset account and a redraw facility are both common features of a home loan. There are some important differences you should consider before deciding which may function better for you:
- An offset account’s funds are generally accessible whenever you want them, whereas you must apply to withdraw money using a redraw facility. There are also limitations on how much you may be able to withdraw using a redraw.
- An offset account can be deposited into with any spare savings you may have, but a redraw facility is only used for repayments higher than your usual monthly repayments. You can only redraw from this extra money you have paid.
- Depending on your lender, you may find an offset account with low or no account-keeping fees and some transaction fees. Redraw facilities may accompany fees in some situations.
- An offset account is easier to access, and therefore easier to spend the money in the account. A redraw facility may be more suitable if this will minimise or prevent any unnecessary spending.
So, is an offset account right for you?
An offset account can be a helpful tool to help you save money and time on your home loan. Whether it will be right for you is completely based on your individual circumstances. Before you choose an offset account, you should consider the following features:
- Whether you want an account with 100% of your total balance offset against your loan or an account with a partial amount offset (e.g. 50%).
- No minimum or maximum balance, so every dollar helps with your loan management and you can continue to deposit into the account without limitation.
- Low or no fees on the account.
- The ability to link multiple accounts as offset accounts on your loan.
- Whether you can use the account for different transaction types if you need to, including debit cards, ATMs, EFTPOS, BPAY, direct debit and in branch.
Other ways you could save on your home loan
If you are looking for ways to save money on your home loan, you may consider implementing these ideas:
- Negotiate a lower interest rate: Do research on the options available to you and negotiate a lower interest rate with your current lender or consider refinancing.
- Keep your repayments the same: If you obtain a lower rate, keeping your repayments the same will help you repay your loan faster
- Increase your regular payments: Making additional repayments each month can help you repay your loan faster.
- Pay fortnightly: Paying fortnightly instead of monthly can pay off your loan faster. In this way, you are essentially making an extra monthly repayment each ear. Check with your lender how they calculate your loan repayments as this may vary from lender to lender.
Loans with Jacaranda Finance
Unfortunately, Jacaranda Finance does not offer home loans. However, if you are looking for smaller finance, Jacaranda Finance offers fast personal loans from $300 to $10,000. We are a 100% online lender that specialises in speedy loans; we are Australia’s first lender to deliver a 60-second loan transfer. We can be more lenient in our credit requirements than traditional lenders, meaning that we can offer bad credit loans to eligible borrowers.
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Written by Jacaranda Team