Offset Accounts – what are they, how do they work and what are the benefits
An offset account is a transaction account linked to an eligible home or investment loan. Instead of receiving interest on the savings account (which is taxable) you only pay interest on the balance of the home loan less the balance of the offset account (tax free savings at home loan rate of c.4.0%). It effectively reduces the amount of interest charged over the life of the loan and means the loan is paid off in less time.
Many lenders offer the option of a 100% Offset Arrangement as a way for customers to reduce the interest payable on their home loan.
How does it work?
The balance in the transaction account ‘offsets’ daily against the loan balance.
Interest is then calculated on the loan balance minus the balance in the transaction ‘offset’ account in the offset arrangement.
If the loan principal is $500,000 and balance in the transaction offset account linked to the home loan is $60,000, the interest is calculated on $440,000.
Let’s say the minimum principal & interest repayment is $2,400 per month for the $500,000 loan. For this example the interest component is $1,800 of this and the other $600 is principal.
When the net balance is $440,000 you still pay the same $2,400 per month. However, since interest is only paid on the net balance the interest component is less (let’s say $1,600) and the principal repayment has now increased (to say $800).
All things being equal this will accelerate repayment of your home loan. Rather than 30 years it would be paid off in less than 24 years.
Important things to note:
In the vast majority of cases offset is only available for variable rate home loans. There are a few instances where customers can offset fixed rate home loans. Ask us if that is of interest to you.
In the vast majority of cases only one offset account can be linked to one home loan account in an arrangement and each home loan must have its own separate offset account linked. There are a handful of lenders that permit multiple offset accounts to be linked to a home loan.
Generally speaking, the offset account needs to be in the same name(s) as the home loan itself. Non-borrowers (third parties) cannot be an account holder of the linked transaction account.
Additional fees may apply to having an offset arrangement (either monthly or annual fee).
The concept of offsetting your home loan is available to most people, whether or not you have an offset account. This is because extra funds paid into a variable home loan are already offsetting the loan.
To see the impact this could have on your home loan go to the Lump Sum Repayment Calculator. Enter the loan amount, loan term and interest rate. Then set the lump sum to the offset balance and change the starts at time to 0 years. See then how much interest and time can be saved on your home loan.