What are offset accounts?
An offset account is a bank account which is linked to your home loan and the balance offsets the amount owing on your home loan.
Offset accounts also function as normal bank accounts so you can deposit and withdraw money as you wish.
How does an offset account work?
Offset accounts allow you to save on interest cost as you only pay interest on your home loan balance minus your offset account balance.
If you are paying Interest Only on your home loan, your repayment is reduced by the same portion the loan balance is offset.
If you are paying Principal & interest, your overall repayment amount does not change but a larger proportion of the repayment goes towards paying down the principal.
Benefits of having an offset account
Offset accounts enable you to reduce the amount you repay as interest and more of the repayment goes towards the repayment of the principal of your loan.This allows you to pay off your loan sooner.
For investors paying Interest Only, offset accounts allow them to accumulate savings for use towards the deposit of the next property purchase.
Another advantage of offset accounts is that while benefiting from lower interest payments, you retain the ability to access your funds and make withdrawals whenever you want.
Disadvantages of having an offset account
Conversely, offset accounts can have some disadvantages. Compared with a regular savings account, you cannot earn interest on your offset account.
What is more, offset accounts are only beneficial if you have a substantial amount of money in the account compared to your loan balance. The benefit from having this account ceases if you decide to use your funds elsewhere. Therefore, if you want to use the funds you have saved in your offset for other investments, you will have to start paying interest on the (higher) principal outstanding.
It is also important to be aware that your interest rate could be higher if you choose to have an offset account as some lenders offer lower rates on their “basic” home loans products (no offset feature) and higher rates for their offset packages.
Which are the most popular variable rate loans with offset accounts?
Most lenders, especially major lenders, offer offset accounts with their variable rate loans. These include CBA, NAB, ANZ, Westpac, St George and Macquarie. Non-major lenders such as ING, TMB, Resimac etc also offer offsets accounts.
If an offset account is an important feature for you, it is important to bring this to your broker’s attention as some non-major lenders who offer competitive rates, do not offer offset accounts.
It is also important to be aware that not all lenders offer 100% offsets. Some only offer partial offsets, which means that only a part of the balance of your offset account will actually offset your loan. For example, if you had a 50% partial offset account, with a loan balance of $500,000 and savings of $100,000, you would offset $50,000 (50% x 100,000) from your loan balance and pay interest on $450,000.
Fixed home loans with offset accounts
There is a handful of fixed rate home loan products that provide the offset feature. These include ANZ’s 1-year fixed home loan product, TMB’s fixed loan product and Bankwest’s partial offset feature for fixed loans.
The difference between offset and redraw
Another home loan feature which is similar to offset accounts is redraw but the two are not to be confused.
Offset and redraw are similar in the sense that they both help reduce the amount of interest paid on your home loan and help you repay your loan quicker. However, unlike offset accounts which are separate from the home loan and are like every day transaction accounts, redraw facilities are extra repayments that you have made on your home loan. You are still able to access redraw funds and make withdrawals.
Most recently, given interest rates are at a historic low, offset accounts are being used as part of a split loan structure. This structure allows the borrower to benefit from both having a fixed and variable loan, while also offsetting their interest payable. Find out more about using a split loan structure here.
The Case Study in one of our other blog posts “Split Loans – What Are They?” demonstrates how having a split loan with part variable (with offset) and part fixed can deliver the lowest interest component, as opposed to having a fully fixed or fully variable loan.
How do I open an offset account?
You can easily open an offset account when you take up an eligible home loan. You can inform your broker that you would like an offset account so that they can apply for the offset feature as part of your home loan application.
Nonetheless, most lenders allow you to open a new offset account after your loan has settled, and you will be able to link this to the loan. Opening a new account can be done at a bank branch where the staff can complete identification checks.
For our expat clients, get in touch with your broker for assistance with opening a new account.
How many offset accounts can I have?
Traditionally, you can only have one offset account linked to your home loan. However, some lenders do allow you to establish multiple offset account to help you better manage your cash flow. Again, this is not a feature all lenders offer – if this is a feature which is important to you, it is important to bring this to your broker’s attention early on, so that they can make lender recommendations accordingly.
If you need assistance with offset accounts or have queries regarding your home loan, please get in touch with our broker team today.