When selecting a home loan, lenders, interest rates and affordability are generally our first thoughts. But what about the specific features that differ between loan types?
Loans should be tailored to suit a buyer’s personal circumstances and future financial goals, so any beneficial attributes like offset accounts should always be evaluated and utilised where possible.
We obviously also want to try and save ourselves some money in the process, and an offset account can literally save you thousands.
Let’s take a look at what an offset account is and how it puts cash back in your pocket.
What’s an Offset Account?
Offset accounts are savings accounts that work in collaboration with your home loan.
Offset accounts allow the holder to deposit their own savings which reduce the total loan amount, thus offsetting the interest payable. The funds are still accessible to the holder like a regular savings account.
The main advantage of an offset account is that the funds are yours, using it to make deposits, which is then automatically transferred into your home loan account.
This reduces your loan’s balance, which in turn reduces the loan’s interest, which ultimately lowers your repayments.
These funds are guaranteed by the government up to a total of $250,000 without affecting the deductibility paid on the loan.
Here’s an example:
Your home loan is $850,000. You have deposited $50,000 into your offset account. This means you are now only paying interest on the $800,000 balance.
Can I use my extra cash to pay off the loan quicker?
Although this is still a possibility, it may not be wise if you need a bundle of cash in an emergency. You could opt for a loan with a redraw facility, however lenders will quite often charge you a hefty fee to do so.
These other redraw options also usually come with limits – sometimes only allowing three redraws per year!
The Good and the Bad
Advantages of an offset account
- You can manage your income and home loan more effectively.
- It can be set up to automatically transfer funds into it.
- Extra income can be used to reduce the interest on the loan.
- Save on your tax.
Disadvantages of an offset account
- Difficulty staying disciplined – easier accessibility influences you to spend unnecessarily.
- You could pay a higher interest rate if you want it with a basic loan.
The downside is that not every home loan offers an offset account option and are generally found attached to loans with a variable rate. Also, just be aware that some may even charge a small fee.
Partial offset accounts are also another alternative. This means that only a percentage of the saved amount will count towards the deduction of the interest.
If you think you’ll need money readily available in the near future, or you plan to withdraw regularly from it for smaller purchases, then an offset account is the best option when selecting your home loan.
It can be difficult evaluating loan options, so it’s important to speak to a professional to discuss all of your loan-related goals.