Offset home loans , everything you need to know
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 does an offset account work?
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 you’re 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.
Does it cost more to have an offset account on my mortgage?
The short answer is: it might.
Generally, home loans with more features - like an offset account, extra repayments or a redraw facility - tend to have slightly higher interest rates attached than a basic, no-frills option. That means it’s important to weigh up the cost of this higher interest rate, against the potential savings from having the offset account. It might only be a good idea if you have a large chunk of savings to park in the offset account.
The other added cost to consider is that some mortgages have an optional offset account, but you’ll need to pay an extra fee to access it. If this is the case, then just like with the interest rate, you’ll need to weigh up the benefit of having the offset account against the extra fee.
What’s the difference between an offset account and making extra repayments?
Another one of the features on offer for home loan borrowers trying to save on interest is the ability to make extra repayments. Similarly to an offset account, this lowers your principal loan amount quicker, cutting down on interest.
The benefit to making extra repayments is that you’re actually paying off your principal loan amount quicker, whereas with an offset account, you’re only lowering the portion of the loan amount you pay interest on. It’s also a little more common to find a mortgage offering extra repayments than an offset account.
The downside is that its less flexible. With your extra funds put away in an offset account, you can still access them, and use the account the same way you would a bank account. If you use those funds to make extra repayments instead, then you can no longer use them for daily spending. You may be able to get them back by using a redraw facility - but keep in mind there could be a fee for doing so, or a minimum amount you need to redraw.
It’s up to you to decide which option is better for your needs - or, if you opt for a full featured home loan, maybe you can use both!
How do I find the right offset mortgage for me?
Decided an offset home loan is right for you? Great! Now you just have to think about all the other aspects of a home loan, like the interest rate, fees, and other features. Then you have to find one that’s available for how much you want to borrow and works with the deposit you’ve saved up. Sound like a lot of work? Well, don’t worry, that’s where Mozo comes in.
You can check out some killer offset home loan options in the table above and click the blue ‘go to site’ button to go through to the lender’s website and start an application when you find one you like the look of.
Or why not use our home loan comparison tool to compare the rates and features on a huge number of mortgage offers from a range of lenders, including big banks, mutuals, online banks and non-bank lenders.
If you already have a home loan but want to refinance to an option that comes with an offset account (and a super low interest rate while you’re at it!) then take our Switch and Save calculator for a whirl. You can set it up to show you home loan options that suit your goals - whether that’s cutting down on your monthly repayments, or paying your mortgage off quicker.
Saving money on your home loan has never been so easy, huh?