This year has seen a phenomenal increase in the number of people looking to refinance home loans in Australia. With a great range of refinance cashback deals on offer and fixed interest rates available below 2%, you can see why many think this is an ideal time to refinance a home loan in QLD. But refinancing should always be about more than just an interest rate. It’s also important to consider what kind of home loan features will be most beneficial for your current financial situation and long-term goals. And while most people can see the benefits of a redraw facility or the option to make additional repayments, many are less certain when it comes to offset accounts. Some aren’t quite sure what an offset account is. Others can’t decide if it will be a help or a hindrance in managing their home loan. These are just some of the reasons why it’s a great idea to talk to a mortgage broker in Queensland before you decide to move ahead with refinancing your home loan – a broker can give you tailored advice about which home loan features are right for you.
What’s A Home Loan Offset Account?
A home loan offset account is similar in many ways to an everyday transactional bank account. You can have your salary deposited straight into the offset account, and you can use the account to pay bills, buy groceries or book a holiday online (pretty much whatever you would ordinarily spend money on). The main difference between your everyday bank account and an offset account is that your offset account is linked to your home loan. And any funds that are sitting in the account will be “offset” against your mortgage balance when the lender is calculating how much interest you owe. This makes offset accounts a fantastic home loan feature for homeowners who have built up cash savings.
How Is Interest Calculated with An Offset Account?
If you decide to include an offset account when you refinance a home loan in QLD, you won’t automatically get charged interest on the total mortgage balance. Instead, your lender will determine how much you have in your offset account, deduct this amount from your mortgage balance and then calculate interest based on the remaining total.
For example, imagine that you have a home loan balance of $475,000. In your offset account, you deposit the full balance of your savings, which total $60,000. Instead of being charged interest on $475,000, you’ll only be charged interest on $415,000 (475,000 – 60,000 = 415,000). This can add up to a considerable reduction in the amount of interest you have to pay throughout the life of your home loan.
What Are the Benefits of Having a Home Loan Offset Account?
For those who are planning to refinance home loans in Australia, it’s important to consider the pros and cons of any product or feature before deciding if this is the right choice for you. With regards to a home loan offset account, the benefits include:
- Potential for significant savings: If you have savings that you can keep in your offset account, then you could save thousands of dollars on interest over the life of your loan. If these savings are then invested back into your loan in the form of additional repayments, you could pay off your loan years earlier than you thought.
- Retain control of your savings: With a home loan offset account, you retain full control over your cash savings at all times. This means that if you decide to invest in a renovation a few years down the track or buy a new car, you can instantly access the funds you need.
- Save on tax: According to the Australian Tax Office (ATO), the interest you earn on money held in a savings account counts towards your taxable income. But any money that you save by paying less interest on your home loan won’t be subject to tax. Remember to always talk to your accountant for personalised tax advice.
What Else Should I Know About Home Loan Offset Accounts?
A home loan offset account will sometimes come with higher lender fees or a less competitive interest rate. As a result, it’s important to calculate any potential savings you might obtain through the offset account and then compare this to the added cost of this particular home loan feature.
If you’re wondering if a home loan offset account is right for you, then start by talking to an experienced mortgage broker in Queensland. At Borro, we can assess your current financial situation, compare suitable loan products from a wide panel of lenders and offer expert and unbiased advice on whether a home loan offset account is going to work in your best interests.