If you’re looking to save on your home loan, picking one that comes with an offset account attached may be just the ticket.
This excellent feature means your savings stash is constantly lowering the amount of interest you pay on your mortgage, even while you’re using those funds for your day-to-day spending and bills. We’ve written a full guide to offset accounts that you can read in more detail or, check out the answers to some of the top question about offset accounts below.
How an offset account works
So you know that an offset account can save you on interest - but just how does it do that?
Basically, instead of being charged interest on your full mortgage amount, you’re only charged interest on how much you’ve borrowed, minus the balance of your home loan offset account.
Here’s an example: Say you had a $300,000 mortgage and $50,000 parked in the attached offset account. Instead of paying interest on the full $300,000, you would only have to pay it on $250,000.
Since interest is charged as a percentage of your loan amount, this lowered principal amount can mean huge savings over the life of a 25 or 30 year mortgage.
How much will I save with an offset account?
Now we get to the really important part: working out how much money an offset account could put back in your pocket.
Let’s return to our example from above. If you have a $300,000 home loan and $50,000 stashed in your offset account, you only pay interest on $250,000 of your loan. For argument's sake, let's say your home loan came with an interest rate of 4.00% and a loan term of 30 years. If you were paying interest on the full $300,000 amount, you’d be up for $215,609 in interest. But with your handy offset account, you’d only pay $179,674 in interest. That’s $35,935 saved and you barely even had to
lift a finger!
Keep in mind this example is only indicative, and you should crunch the numbers on your own home loan or talk to your lender to find out how much you could save.
What does a “partial offset account” mean?
Not all offset accounts are created equal, and it pays to double check what
you’re signing up for. A full offset account means that 100% of the funds in your account will be offset against what you owe on your home loan.
A partial offset account means only a part of the balance in your account offsets against your home loan amount. So, using the same example as above, if you have $50,000 in your 40% partial offset account, that means $20,000 (40% of $50,000) would be deducted from your loan principal. So, on a $300,000 home loan and you’d pay interest on $280,000 of your original loan amount.
Compare offset account home loans interest rates
Having an offset account attached to your loan can help reduce the amount of interest you pay and has the potential for big savings However, one other easy way to save on interest is to choose a competitive home loan interest rate. Our Home Loans Interest Rates page can help not only help you compare home loans with an offset account, but some of the available interest rates in the market.