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Offset accounts: what to consider?

Offset accounts: what to consider?

When interest rates are low, home owners will often look at ways they can pay off their home loans faster, including increasing the amount and frequency of repayments.

Another way of potentially bringing the balance of your loan down and paying it off faster is to use an offset account.

What is an offset account?

An offset account is an everyday bank account that’s linked to your home loan. You can deposit your salary and savings into the account and the balance is then offset against the amount owing on your home loan.

Say you have a home loan of $250,000 and $30,000 in your offset account; in this situation, you’ll only be charged interest on a loan balance of $220,000 ($250,000-$30,000).

Because the offset account acts like an everyday account, your $30,000 is still accessible whenever you need it, even while it’s working to reduce your overall interest payments.

The advantages of an offset account essentially depend on how much money you have sitting in it and the type of offset you have. 

Key considerations

Because all offset accounts are different, there are some key questions to ask when looking at opening one.

  • Is your loan eligible for an offset account? You can find this out by contacting your financial institution, but typically fixed rate loans will have more limited options;  
  • Is 100% of the balance offset against the home loan?
  • Is there a limit to the balance of the account that will be offset?
  • Are there any account-keeping fees and will they negate any of the financial benefits?
  • Are there any limits to the amount or types of transactions you can make?
  • Will the reduced interest on your home loan be greater than the interest you would earn if the savings in the offset account were in a savings account?

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.