What is an Offset Account? Home Loan Basics
Buying your first home is a huge milestone but navigating the world of home loans can feel like deciphering a secret code. One term that often pops up and confuses our first-time home buyer clients is “offset account”. That’s why we’ve written this quick, easy-to-understand guide on everything you need to know about this popular home loan feature. Read on to learn what an offset account is, how it works and possible disadvantages to consider for your situation. For more information on home loans and their features, get in touch with us for a free chat about your home loan needs.
What is an Offset Account?
An offset account is a transaction bank account linked to your home loan. It works just like a regular everyday account where you can deposit your salary and savings, and make withdrawals. However, the magic happens behind the scenes. The balance in your offset account is offset against your loan balance. It is also included in the government’s Financial Claims Scheme where deposits are protected up to a limit of $250,000. Keeping money in your offset account means you only pay interest on the difference between your home loan amount and the balance in your offset account.
How Does an Offset Account Work?
Let’s imagine you have a home loan of $600,000 and $20,000 sitting in your linked offset account. Typically, with a standard home loan, you’d pay interest on the entire $600,000. But with an offset account, the bank calculates the interest on $600,000 minus your $20,000 offset balance, which reduces the total to $580,000. Using your offset account to your advantage over the life of your loan can translate into significant savings on interest payments and can help you pay your mortgage off sooner.
Here’s an example:
- Home loan balance: $600,000
- Offset account balance: $20,000
- Interest rate: 6%
Without an offset account, you’d pay interest on the full $600,000, resulting in $36,000 in annual interest payments ($600,000 x 6%). Interest is calculated daily and charged monthly.
With an offset account, as a basic working – the bank would calculate the interest on $600,000 minus your $20,000 offset balance, which is $580,000. This translates to a significant saving on interest payments over the life of your loan. In this example, your annual interest payment would be $34,800 ($580,000 x 6%). That’s a saving of $1,200 in the first year alone! And with the power of amortisation and daily reduction in interest by leaving as much as you can in the offset the savings add up.
Offset Account Disadvantages
While offset accounts can offer significant benefits, it is important to consider some potential drawbacks:
- Limited offset options: Not all lenders offer offset accounts and some may only offer them with variable interest rate loans. That’s why the best thing to do is have a mortgage broker research all your options to find you the right home loan and available features to suit your needs. And some have multiple offset accounts which means you can have ALL of your funds in separate accounts to maintain separation of expenses or savings goals all pointing at and reducing your home loan interest being charged.
- Balancing act: Maintaining a healthy balance in your offset account is crucial if you want to maximise its benefits. An expert mortgage broker can explain how you can use it according to your savings, income, expenses and any other unique factors you have.
- Transaction fees: Some offset accounts may have associated transaction fees so be sure to compare options with the help of a mortgage broker before choosing one.
North Brisbane Home Loans: Your Partner in Home Loan Finance
At North Brisbane Home Loans, we understand that navigating the home loan process can be complex. Our expert mortgage brokers can help you find the right home loan product for your needs. We’ll work closely with you to understand your financial situation and goals to ensure you get the right deal for you on your first home loan.
Contact North Brisbane Home Loans today for a free appointment and take the first step towards homeownership with a home loan that works for you.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
