With an offset account you can have your smashed avo and still buy a home.
What is an offset account?
An offset account is an account linked to your home loan, which can be used for transactions or savings. The balance of the account is offset against your home loan balance so you are only charged interest on the difference.
To explain this, let’s assume you have a home loan of $500,000 and you pay 5% per annum interest on it. You have an offset account linked to the mortgage and you deposit $20,000 in it. You will now be charged interest on $480,000 instead of the $500,000. This scenario will continue as long as you keep the $20,000 in your account. This means you would save $1,000 in one year if you keep that money in your offset account.
By increasing the amount you hold in your offset account, you decrease the amount of interest you pay.
How much can I save using an offset account?
That depends on how much money you can put into your offset account. If you have a significant amount of money parked in your offset account, you can potentially save thousands of dollars over the life of your mortgage. Typically, home loan interest rates are higher than interest rates on savings accounts. That means an offset account will save you more money than any savings account may earn you.
Here’s a sample calculation to show the savings an offset account can help you make over the length of your loan term:
Loan amount: $500,000
Loan term: 10 years
Interest rate: 4.5%
Offset amount: $5,000
Amount saved: $3,039
Offset amount: $20,000
Amount saved: $11,871
What’s the difference between an offset account and redraw facilities?
Both of them save you interest on your home loan payments by making extra payments to your home loans and hence saving the interest on that payment. Redraw facilities however, are designed to discourage very frequent use of the money already paid. You can ‘redraw’ the additional amount you pay, but it usually will incur a fee and will take some time to ‘clear’. Offset accounts have no such fee or time restrictions.
How much does an offset account cost?
Offset accounts may have a fee attached to them, or the interest rate you pay for a loan with an offset account may be higher. However, this varies, so chat to your broker or lender about options for getting an offset account.