Is your offset account working for you?

Finding the home loan that’s right for you can be an extensive process of research. There are lots of options – and lots of lenders – to choose from.

A common home loan feature you will come across is an offset account. This account does what it says, any amount you have in the account offsets how much interest you pay over the life of your loan. For example, if you have a $500,000 loan and $10,000 in an offset, you’re only paying interest on $490,000 of your loan amount. More offset money = less interest. Less interest = paying off loan sooner. Great, right?

Whilst offset accounts can potentially help you reduce both interest and loan term, it’s important to know that home loans that come with offset accounts can have higher interest rates than those without. So, unless you are using it, you could be paying more than you would want to.

But what if you don’t have a lot of money to put into an offset? How can you utilise it and have it work for you as hard as it can?

• Offset accounts can function the same as regular transaction accounts, meaning you can have bank cards attached to them. Depending on your loan features, you may be able to have multiple accounts. Consider opening one up as a transaction account and have either your salary – or a portion of – going into this account each pay.
• Whilst savings accounts and term deposits are great, you might be better off moving those savings into an offset account instead. You won’t earn any interest on your money (which is classed as taxable income), but the benefits of offsetting may outweigh any bank interest you might have received. Have an emergency fund you aren’t going to touch? Put it in an offset.
• If you’ve bought a fixer and have money for renovations, stick those funds in an offset. Depending on the work you need to get done, that money could be sitting there for months whilst permits, builders or plans are being organised. Even if it’s only in there for a month or two, it will make a difference.
• If you’re someone who struggles to save, consider having a separate offset account where you move any money you have leftover from your pay into, where it can be kept out of sight. Or you can put money into one that is used for saving up for bigger purchases like insurance or car registration.

Whilst an offset isn’t going to decrease your monthly loan repayments, what you will be doing is paying your loan off quicker, as less interest will be added back onto your loan each month.

The benefits of an offset can be difficult to visualise, as a loan term is decades long. If you’re not quite sure how your offset will work for you, there are offset calculators available online that you can use to see any long-term potential benefits.

But, if you have one and don’t think it’s right for you, contact your lender to see if they can give you a better loan rate without an offset.

General advice disclaimer

The information contained in this document is provided for education purposes only. It has been prepared without taking into account your particular financial needs, circumstances or objectives. You should consider the appropriateness of the information as it relates to you. You may wish to consult an adviser before you make any decisions relating to your financial affairs.