If you're about to take out a home loan you might be wondering how you can pay it off sooner, while still having cash for everyday expenses and to save for a future goal.
One option is to use an offset account, which is an everyday savings account typically linke to a variable, rather than fixed, home loan. An offset account allows you to reduce the term on your home loan, shave thousands off what you owe and still give you access to the money in your bank account.
There are two types of home loan offset accounts available, these are 100% offset accounts and partial offset accounts.
The vast majority of offset accounts available in Australia today offer a 100% offset.
How does an offset account work?
You make regular deposits, such as your salary, bonuses or other income, into the account to offset the balance owing on your home loan, so you are only paying interest on the principal. The more money you have in your offset account, the more you can save on your home loan, as you'll be getting charged less interest.
Let's look at an example:
Say you keep $2,500 in your offset account. If you have a $350,000 home loan with an interest rare of 5.20% per annum you'll only pay interest on $347,000, thanks to the offset. This means you'll end up paying off your 30-year home loan three months early and saving about $7,688 (1) without any impact on your lifestyle (1).
And by using your credit card to pay for your everyday expenses, and then making sure you pay it off monthly to avoid paying interest, more money will be in your offset account for longer.
What are the benefits of having an offset account?
- You can easily access your funds to pay your everyday bills or to finance one-off purchases, such as your next holiday.
- Offset accounts usually provide a level of flexibility that other home loan accounts don't, so check what features are offered.
- An offset account could reduce the impact that a change in your circumstances or an interest rate change could have on your home loan
Are there any downsides of an offset account?
- Having easy access to your money could reduce the amount you have to offset against the interest on your home loan, if you decide to take it out of the offset account.
- Some financial instituions charge fees to administer offset accounts. You'll just need to consider whether the costs of the fees will outweigh the benefits.
How is a redraw facility different to an offset account?
If you make extra repayments on your home loan, a redraw facility lets you take the extra money out again if you need it. So rather than saving your money in a seperate account, you can reduce the amount of interest charged on your loan - by paying more than you need to - and accessing the extra money if you need it. For example, to pay for a house renovation, a holiday or school fees.
Whereas, an offset account is more like a traditional savings account that you can use for paying everyday expenses and making one-off purchases, while at the same time reducing the interest and the time it takes to pay off your loan.
What about using a savings account or a term deposit to pay off my home loan sooner?
You can deposit money into a higher-interest savings account or a term deposit to seek a potentially higher return. However, be aware that you will have to pay tax on any interest that your savings account or term deposit earns, whereas you won't pay tax on the interest you save on your home loan as a result of having an offset account.
What's right for you?
If you'd like to know more about how an offset account work, get in contact with our mortgage consultant on (03) 5222 1664.
1. Calculations are illustrative, do not represent actual rates or products, and are based on an interest rate of 5.20% p.a.