What is a home loan offset account?

A simple guide to how it works & why it matters.

If you’re starting your journey to becoming a homeowner, you will no doubt be learning a lot of new key phrases associated with mortgages. One of these will likely be “offset accounts”, but what is actually the function of these accounts? And how can they benefit you? We’ve compiled some information about offset accounts and how they may be of assistance to you as a borrower.

How does a home loan offset account work?

Much like bank accounts you use on a daily basis, an offset account is a transaction account – however, its power lies in the fact that it’s linked to your mortgage. As a result, in place of earning interest like a regular savings account, the funds in your offset account reduces the balance of your home loan that interest is charged on.

When calculating your interest, the amount of money in your offset account is deducted from your home loan – lowering the amount of interest paid on your mortgage.

An example to illustrate this function would be if you have a $500,000 home loan and $50,000 in your offset account, you’ll only be charged interest on $450,000 of debt, instead of the actual $500 000 balance. 

Do you earn interest on an offset account? 

Although you do not earn interest on an offset account you do save money by reducing your home loan interest – in many cases this is more beneficial. If you were earning interest on funds in a savings account, you would likely pay tax on those earnings, but when using an offset account, you save money on interest, and you don’t get charged tax on savings! 

If you were to ask a Borro mortgage broker the most simple way to have an offset account explained, they would tell you that an offset account ensures that your savings work for you by lowering your loan interest, while you still have full access to the funds.

What is an offset account?

This is often a home loan feature that many Australians overlook, but can make a big difference over time. An offset account is worth considering. 

This function essentially allows you to reduce the amount of interest paid on your mortgage with your everyday savings. An offset account is connected to your home loan; working quietly in the background assisting with reducing interest charged on your home loan; all while keeping the funds accessible if required.

If you’ve come across this blog while searching “what is a home loan offset account?”, or if you’re simply wondering if it’s worth it for you, the essential information has been compiled below for you to consider.

What are the benefits of an offset account?

There are many advantages to having an offset account. Below we’ve compiled some of the most impactful benefits for homeowners.

Reduces interest payable

The funds added to your offset account lowers the overall interest charged on your home loan. This can save you thousands over the life of your loan – particularly if you are adding money to your offset account on an ongoing basis.

Speeds up loan repayments

Minimising the interest portion of your mortgage repayments allows for more of your regular payment to go towards the loan principal. This ensures that you are paying off your home loan faster.

Keeps savings accessible

Whereas an extra repayment is out of reach once paid, the funds in your offset account remain accessible should the need arise. This is a huge benefit for emergency funds or if your financial situation means that you have fluctuating income. So, is an offset account worth it? While it may not be a realistic solution for everyone, if you reliably maintain a healthy savings then the interest reduction on your home loan often outweighs any associated fees.

Can you have an offset account with any home loan?

Not all mortgages will have an offset option, so it’s worth checking before you apply.

• Variable rate home loans – Most commonly offer offset accounts
  
• Fixed rate home loans – May or may not allow partial, so read the fine print
  
• Interest-only loans – Offset is often available but may function differently
  
• Investment loans – Lenders frequently offer investment loans with an offset feature, which can be tax-effective
  
• Business loans – Certain specialist lenders can offer business offset accounts.

Offset account fees, rates and fine print

Before selecting an offset home loan it’s essential to check if you’ll be subject to:

• Annual or monthly account fees
  
• Higher interest rates compared to standard loans
  
• Full or partial offset on the account
  
• The comparison rate – including fees and charges.
  
  

It’s also important to note that offset accounts do not earn interest. However, the benefits usually outweigh those of a standard savings account. Remember, you can be taxed on interest earned but not on interest saved!

When is an offset account a good fit?

An offset account could be beneficial for you if:

• You maintain consistent savings
• You’re self-employed and want flexibility with your funds
• You want to reduce interest without losing access to your savings
• You’re an investor looking for flexible loan features.
• You’ve been advised by your financial advisor or accountant
  
  

Are you looking for the best home loan with offset in Australia? A Borro mortgage broker can help match you to the right product.