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Financing a home loan – the offset option

02 September 2021

Offset Account

If you’re applying for a home loan, it makes sense to look at the types of loans available. An offset account loan might suit you financially. Here’s how they work and their limitations. For instance: if you have savings you want to park somewhere, putting it in an offset account can help you save interest on your mortgage.

Let’s see how this home financing option might work for you.

What is an offset account?

An offset account is like an everyday banking account, only it’s linked to your home loan. Essentially, it ‘offsets’ any funds you put in it against your home loan, which means you only pay interest on the net balance (your mortgage balance minus your offset account balance).

What does that mean, exactly? Well, if you have a home loan of $400,000 and you have $50,000 sitting in an offset account, you’ll only pay interest on $350,000. That would translate to several thousands of dollars saved over the life of your loan, so it can help you get a bit ahead on your mortgage.

How can you use an offset account?

If you treat your offset account like a savings account and add to it over time, you may pay less interest over the life of your loan. That could, over time, reduce the life of your loan.

So how much is a good amount to have in there? Having at least $10,000 may be ideal to reap the benefits.

You might decide to park your savings in your offset account or have your monthly salary deposited there. If you have a side hustle or microbusiness that generates income, you might arrange to direct funds to your offset account. And if you’re a freelancer, you might put the offset account details on your invoices, so any earnings go straight to that account.

Similarly, if you were to get a work bonus or inheritance and you weren’t sure what you wanted to do with it yet, putting it in your offset account means your money will work harder for you than it might in another type of savings’ account.

How do you get one?

If you’re buying property and doing research on the different types of home loans out there, look at mortgages that have an offset facility. Check the percentage by which it ‘offsets’ your loan – some offset your loan by 80 percent of the funds, while others are 100 percent offset.

You could also chat to your lender or mortgage broker about loans that have offset facilities. Don’t forget to compare the interest rates – sometimes loans with an offset facility can have a slightly higher interest rate, so it may only suit you if you always have a large amount of money in your offset.

If you already have a mortgage, you may wish to look at refinancing to a home loan has an offset facility so you can save as much interest on your repayments as possible.

What’s the difference between a redraw and an offset?

An offset account is a like an everyday transaction account that’s linked to your mortgage, and the balance ‘offsets’ your loan balance, so interest is only calculated on the remaining loan balance. You can access the funds whenever you like – just like a savings account.

A redraw facility is a bit different – it allows you to access funds from extra loan repayments you may have made. That extra money sits in your mortgage and reduces the interest portion of your loan, and you can ‘redraw’ the extra money if you need to.

What benefits does an offset account have when it comes to owning property?

There are benefits to having an offset account, including:

The flexibility. Because the offset account is a transaction account, you can access your money whenever you like and make unlimited withdrawals and deposits.

You’ll pay less interest. You’ll pay interest on the home loan principal minus whatever is in your offset account, which can help you pay your home loan off faster.

There are no restrictions. A home loan with a redraw facility may have restrictions and fees attached when you withdraw money, unlike an offset account.

There are tax benefits. The money in your offset account isn’t considered taxable income, as this type of account doesn’t generate any interest.

What limitations are there with offset accounts

The limitations of an offset account include:

The interest you pay may be impacted by the balance. You may pay less interest but the amount will vary depending on the balance in your offset account.

You don't earn interest on the amount, as you would if it were invested in a savings account.

You may find you an offset account is only available if it’s tied to a variable interest rate home loan.

While offset accounts won’t suit everyone, they’re worth considering if you’re taking out a mortgage and looking for ways you can minimise the interest you pay.

If you don’t have a large chunk of change to pop into an offset account, you might find other types of home loans (like those with a redraw facility) suit you better, but it’s always a good idea to discuss your personal circumstances with your lender or mortgage broker, so you can get the loan that suits you.

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice.

The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.



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