What is an offset account?
An offset account could save you thousands of dollars and shave years off your home loan over time.
At first glance, it probably seems a bit too good to be true, but we can assure you with a proper understanding of how these types of accounts function you will feel confident that an offset account could save money on your home loan. The first big question you likely have is, what exactly is an offset account?
An offset account is a transaction account that is attached to your home loan. The way this type of account works, is the balance of the account is taken away from the principal remaining on the home loan for interest calculation.
This is an accountant-inspired solution which allows a portion of your interest payments to disappear. An offset account is also useful if you want to pay off your mortgage sooner as a home loan with an offset facility can allow you to reduce the interest payable on your loan balance, which works to reduce your overall debt levels. Like we said, it sounds too good to be true, but it’s not. We are all about making your money work smarter for you, so you don’t have to work harder.
How does an offset account work?
An offset account can essentially be used to build a buffer of repayments which allow a loan to be paid off earlier than the agreed upon term.
For example, if you take out a regular 30-year loan, with an offset account, you are likely to be able to pay off that 30-year loan in 20-25 years. In order to do this, you would continue to pay the minimum repayments on your loan, as you normally would, and then you also pay an extra, additional amount into your offset account. This account basically works like a savings account, by giving you access to funds if you need, it also provides you with a safety net in the event that rates rise or you have income issues and are not able to make the additional payments. In general, offset accounts are great for all homebuyers within all income brackets. You don’t necessarily need to be making huge contributions to your offset account monthly for this to be a good solution for you. Of course, the more you can deposit into your account the better, but even making small monthly contributions will save you money and shave time off your mortgage.
How do I choose an offset account?
While many lenders will offer an offset account product there are some key features we advise you to look for when choosing your account:
- Be sure to choose an account without a balance limit; this will allow you to keep building your savings while also cutting down your home loan term.
- When choosing your account, be sure to opt for an account where 100% of your total balance is offset against your loan.
- As an offset account is similar in many ways to a savings or transaction account be sure to choose an option that treats the account as such. You’ll want an account that comes with a bank card for electronic transfers and which will give you the ability to withdraw money from ATMs should you need to.