Mortgage Offset Accounts Explained

  • 30 September, 2022
  • Carlo Colangelo

Mortgage Offset Accounts are a popular tool that many borrowers use to reduce the interest they pay on their home loans and to pay them off faster.

Most Lenders offer Mortgage Offset accounts, however how they work can vary from Lender to Lender.

Borrowers can also use strategies to increase the amount offset.

How Mortgage Offset Accounts work

A Mortgage Offset Account is an account that holds credit funds/savings that is linked to a home loan.

The funds held in the Offset Account are deducted from the home loan balance for interest calculation purposes.

For example, if a borrower had a home loan of say $800,000 and a daily average of $50,000 in an Offset Account, interest would be calculated on the net loan amount of $750,000.

If this average balance was maintained throughout the loan’s term , and the interest rate was 4.50%, the borrower would:

  • Save $127,388 in interest payments!
  • Shorten the loan term by 2 years and 7 months

Offset Account Features

Key features to be aware of regarding offset accounts include:

  • If you use an Offset Account you will pay a slightly higher interest rate on the loan with most Lenders. The amount involved, however, is minor ranging between 0.10% and 0.25%. Even at 0.25%, on a loan with a rate of 4.50% you still enjoy an offset rate of 4.25%
  • For interest calculation purposes, 100% of the balance in your Offset Account is applied against your loan balance
  • Very few Lenders allow offsets against fixed rate loans and even then, only for very short terms
  • There are no minimum balance requirements
  • You can withdraw funds from the Offset Account at any time

The Offset Account - Greater flexibility

A frequently asked question is, “Why wouldn’t I simply make extra payments or pay a lump sum off the loan? Wouldn’t this accomplish the same thing?”

The answer is yes it would reduce the interest (& term), but it may not provide the same flexibility as a Mortgage Offset Account.

If you pay the funds off the loan, you may be able to re-draw if your loan conditions allow it; – however even if this option is available, it takes time and may involve a modest fee.

A key advantage of Mortgage Offset Accounts is that you can withdraw funds whenever you like.

Savings vs. an Offset Account

Another common question is “Wouldn’t I be better off putting the money into a savings account or term deposit?”

The answer is no!

The reason being, even on term deposit, the rate you receive is unlikely to higher than the rate you pay on your home loan. In addition, the interest you earn is taxable income.

On the other hand, the gain you make with an offset account is tax free!

Different account structures

Depending on the Lender, you may have a single Offset Account, or a series of accounts type where the combined amount is offset against the loan balance.

For example, lets imagine you had the following structure:

  • Primary Offset Account: $25,000
  • Travel Savings Sub Account: $10,000
  • New Car Savings Account: $10,000
  • Bills Account: $5,000

This would result in a total offset of $50,000 & if you had a loan of $800,000, it would mean you only pay interest on the net amount of $750,000.

Taking it to the next level

If you are paid monthly, or fortnightly, and are very disciplined, another way to increase your offset average balance is to:

  • Have your, (and your partners), salary credited directly to your primary offset account
  • Pay all your bills during the month by credit card
  • Clear the credit card in full each month within the interest free period from the offset account

Paying your bills by credit card, depending on the card can also be a way of accumulating additional “reward/loyalty points” from the provider depending on the program.

Summary

Mortgage Offset Accounts are valuable tools that can help home owners reduce the interest they pay and repay the loan faster.

Which Offset Account structure suits you best should be part of the discussion when you are applying for the loan.

While the interest rate you pay on your loan is important, taking advantage of ways to reduce the overall cost is equally important.

If you would like to learn more, or need finance to purchase a home or investment property, don’t hesitate to get in touch.

Carlo Colangelo

Home Finance Broker