How Does An Offset Account Work?

What is an offset account?

A mortgage offset account is a great way to reduce the interest you are paying on your home loan. That means you can pay off your home loan sooner and save thousands. An offset account is simply a non-interest-bearing transaction account that is linked to your mortgage. The main role of this account is offsetting the balance of your mortgage. The more money you have in your offset account, the less home loan interest you pay. For example, if your home loan balance is $400,000, and you have $50,000 in your offset transaction account linked to your mortgage, you will only pay interest on $350,000. That $50,000 can make a big difference over the life of your loan.  And reducing the interest means more of your mortgage repayments go towards paying off your principal amount.

How can I make an offset account work for me?

A mortgage offset account gives you extra flexibility when you pay off your loan, and there are a number of ways to make it work best for you. While some people have their salary paid into their credit card account and use the card to purchase all the things they need during the week, using your offset account instead can help you reduce your home loan interest.

Putting your salary into your mortgage offset account still gives you easy access to your money, and if you’re making weekly or fortnightly loan repayments via direct debit, the rest can contribute towards reducing the interest and the principal of your loan amount. You can also use your credit card and your mortgage offset slightly differently, by leaving your salary in the offset account and using your credit card for all expenses.

These can allow you to take maximum advantage of the interest-free days on your credit card, while your salary offsets the home loan and saves you interest. When you receive your credit card statement, just pay off the balance in full – it’s that easy. Another way to make the most out of your mortgage offset account and pay off your loan is by keeping any additional savings in the transaction account linked to your mortgage.

You can also use any lump sum payments you receive, such as work bonuses or tax refunds. While you may think a high-interest savings account may be a better option in this scenario, the amount of interest you could save on your home loan balance by using a mortgage offset account can be far greater.

How does an offset account work in conjunction with a home loan?

If the home loan you want includes a mortgage offset account, it will be listed under the Features section. At Mortgage House, we offer both fixed rate and variable rate home loans that include the mortgage offset account feature. A fixed rate home loan means your interest rate is fixed for an agreed period, usually up to five years. Knowing exactly what your repayments will be each week, fortnight or month can help your long-term budgeting.

A variable rate mortgage means your interest rate can rise or fall over the life of your loan, depending on a range of both internal and external factors. Having an offset account is one of the most desirable features of any loan, fixed or variable. It will be listed among other features, such as redraw facility or the ability to make additional repayments, and if you can use them together, they can make a big difference to your home loan balance.

Additional repayments: Some home loans will punish you for making extra repayments, but Mortgage House has a large range of mortgages that allow you to do it without attracting a penalty. Making additional repayments means you can pay off your loan sooner, and save thousands on interest.

Redraw: The redraw feature allows you to make additional repayments or lump-sum payments, but withdraw them whenever you need, for whatever reason. This can give you both the benefits of being able to pay off your loan sooner, and the security of having the money available if needed.

A mortgage offset account can work in conjunction perfectly with both these features, allowing you to pay off your home loan sooner and make extra interest savings.

What is a partial offset account?

Offsetting the balance of your home loan with a mortgage offset account is just one of many ways choosing Mortgage House can help you increase the flexibility of your loan. The good news is there is more than one kind of offset account you can have linked to your home loan. Speak to Mortgage House’s experts about both partial and full offset accounts.

Reducing your interest repayments over time by linking a non-interest-bearing savings account to your mortgage fully is still the most popular kind of mortgage offset account. A 100% offset account is what we have described above, in that the full balance of the account offsets the loan amount, and you only pay interest on the difference. The other kind of mortgage offset account is a partial offset account, which is as it sounds, with only a part of the balance – 50% for example – offsetting your mortgage.

There are also other options, such as using a savings account that attracts interest, and using the interest to pay off the principal part of the loan amount. Some banks and lenders may also offer offset accounts where the interest payable on your home loan is paid by the interest earned in the mortgage offset account. However, the interest earned could be a lot less than the interest payable on the home loan. Partial mortgage offset accounts are less popular, and can be less effective in reducing the amount of interest you pay over the life of your home loan.

Who can I speak with to get an offset account explained?

Mortgage House’s Lending Specialists can answer any of your mortgage offset account questions and help you save on interest and pay off your home loan sooner. Our Lending Specialists can also be a great place to start if you are looking for a loan to suit you and your family, including home loans that include the offset account feature. We have put together a list of the top 10 questions to ask a Lending Specialist to help guide you towards a suitable mortgage.

• Which type of loan is best?

You want to feel that your Lending Specialist has asked you several questions and is genuinely trying to assess your individual needs before providing an answer to this question.

• What information do I need to have ready for my home loan application?

Our Lending Specialists will have a plain English checklist of the items you need to gather when applying for a loan.

• What is the Interest Rate?

While you want to hear a low interest rate, we will take the time to explain what the Comparison Rate is, which provides a more accurate platform to measure more than one loan product. Sometimes the lowest interest rate can end up costing you more in the long run.

• What are the fees on the loan?

It is important to have a full list of fees explained to you thoroughly and in an easy-to-understand way.

• Can I lock in my mortgage interest rate between now and settlement?

The answer to this is yes. This means that the lender will lock in your interest rate for a period of up to 2 months from the date your home loan is approved. This means that even if mortgage interest rates go up before your loan has settled, your rate won’t change.

• Is there a fee to make additional repayments?

Ideally, you would like to be able to make additional repayments on your home loan to be able to pay it off sooner and save on interest, without a financial penalty.

• How long will it take for my loan to be approved?
  

This is important, as there can be 3 levels of approvals to understand – Pre Approval, Conditional Approval and Full Approval.

• How long will it take for the loan to settle?
  

The average time for a refinanced loan to settle is approximately 4 weeks from when full approval is given. For property purchases, the average settlement time is approximately 6 weeks from when contracts are exchanged or the 10% deposit has been paid.

What is the difference between principal and interest?

Interest repayments are just one part of a home loan – the other is the principal amount. The principal amount is the original loan amount, or how much the bank or lender has approved for you to borrow. The interest is what the bank charges you to service that loan.

Different kinds of home loans attract different interest rates, based on a number of variables – including risk – and you can choose both interest-only or principal and interest loans. Interest-only loans mean your repayments are only made up of the interest payments. These kinds of loans are popular with investors, who aim to make a profit by selling the home when it is time to pay back the principal amount.

For a principal and interest loan, repayments are made up of both, whether they are weekly, fortnightly or monthly. For most home loans, the majority of the interest you pay will be at the beginning of repayments. That means that in the early years, interest will make up a majority of each repayment. How much interest, in dollar terms, you pay can depend on the size of the principal and the length of the loan.

The faster you pay your home loan back, the less interest you pay. Also, the higher the principal amount, the higher the amount of interest over time. That is why having a mortgage offset account can be so beneficial. Having a savings account that virtually reduces your loan amount means you will save on interest. If you can continue offsetting the balance significantly over the life of the loan, you can save thousands.

Does a mortgage offset account reduce monthly repayments?

A mortgage offset account will save you money by helping you pay less interest over the life of your loan, but it won’t make your weekly, fortnightly or monthly repayments any less. Instead, the savings you make in interest repayments means more of each repayment will go towards the principal part of your loan. That is how you end up repaying your loan faster. Home loan interest is calculated daily and is charged monthly, meaning the longer you can keep as much money in your mortgage offset account, the more interest on your home loan you will save.

Linking a non-interest-bearing savings account to your mortgage means you will always have your money available if you need it, but in the meantime it can make a big difference to your overall financial situation while it is just sitting there. Using such accounts to reduce how much interest you pay can also help you save in other areas. If you have that money sitting in a high-interest savings account, that will attract tax, as the interest you receive is classed as income. The interest you may save by having a mortgage offset account does not attract the attention of the taxman, as it is considered a saving, not an income stream.

What are the disadvantages of a mortgage offset account?

This article has pointed out the large range of advantages of linking a mortgage offset account to your home loan. As well as potentially saving you thousands of dollars of interest over the life of the loan, having a transaction account linked to your mortgage can increase the overall flexibility of your financial situation. It is very easy to manage and by making regular payments into it, such as your salary, you can save straight away when interest payments are calculated each day and applied each month. The flexibility continues by allowing you to access that money whenever you need it, for whatever you need. There are often no extra penalties to access your offset account regularly.

However, there may be some disadvantages to having an offset account. Some banks and lenders may only let you apply the offset account benefits for a fixed term, and others may charge you an additional fee or a higher interest rate as a result. If this is the case, it is important to make sure you weigh up the costs or the limitations against how much you may be able to save by taking up the mortgage offset account feature. Do this by making conservative estimates of how much you may have in your linked transaction account at any one time. Obviously this will just be a guide but it can be a good way to get a solid indication.

Another thing to take into account while weighing all this up is the comparison rate that will be advertised with the mortgage. Every bank and lender has to publicise a comparison rate next to the main advertised interest rate. This is to give customers a clear indication of the approximate rate over the life of the loan, with all the fees and charges included. This is also simply a guide, but it can give you a good picture of how much you may be saving overall.

Another disadvantage of an offset account is it doesn’t actually bring down, or reduce, the principal amount of the home loan.

Offset account vs extra repayments

At Mortgage House, you will find a range of features available across all our home loans. We offer the mortgage offset account feature with both fixed and variable home loans, and the ability to make extra repayments without attracting penalties is also a key feature of many of our mortgages.

Knowing which one of the two is best to help you meet your financial goals can be difficult, so it can be important to know the benefits and disadvantages of each. As mentioned above, having a savings account tied to your home loan can bring down the amount of interest you pay over the life of the loan, and gives you the flexibility of being able to draw on the money you have saved whenever you want, without being penalised. Using the extra repayment feature instead can also help bring down the total interest you pay, and can make a big dent in how long you pay your loan for.

Importantly, additional repayments may also help you pay down the principal portion of your home loan. That is something an offset account cannot do, and some banks and lenders may charge an additional fee for including the feature in your home loan. The extra repayments feature can also have its limitations. You may be charged a fee if you withdraw any extra repayments you have made. The redraw option can increase your flexibility, but there may be a cap on how much you can take out, no matter what the reason is.

Understanding how all this works, and how you can get the most out of your mortgage repayments, can be an important step to financial security. Use our budget calculator to work out whether making extra repayments may be a good option for you now or in the future.