When you’re shopping for a home loan in Brisbane, you'll often come across something called an “offset account.” It’s a powerful tool that could save you thousands over the life of your loan, but what exactly is it, and how does it work?
With over 20 years of experience as experienced mortgage brokers, we've seen how the right offset account can save Brisbane homeowners thousands in interest. Our job is to simplify these financial concepts and help you get the best outcome from your home loan.
Let’s dive into what an offset account is, how it works, and why it might just be the key to unlocking significant savings on your home loan.
What is an Offset Account?
An offset account is a simple yet powerful tool that’s directly linked to your home loan. Unlike an ordinary transaction account, the money you keep in this account offsets your outstanding loan balance, reducing the amount of interest you pay.
In essence, you’re only charged interest on the difference between your loan balance and the funds in your offset account, which can lead to significant savings over time.
How Does an Offset Account Work?
Imagine you have a home loan of $400,000 and an offset account with a balance of $50,000. Instead of paying interest on the full $400,000, you’ll only be charged interest on $350,000 ($400,000 - $50,000). The more money you have in your offset account, the less interest you’ll pay.
Simple Calculation Breakdown:
- Loan Amount: $400,000
- Offset Account Balance: $50,000
- Loan Amount Subject to Interest: $400,000 - $50,000 = $350,000
If your home loan has an interest rate of 6%, without the offset account, you’d be paying around $24,000 in interest annually ($400,000 x 6%).
With $50,000 in your offset account, you reduce the interest to about $21,000 annually ($350,000 x 6%).
That’s a savings of $3,000 in interest for that year alone just by using the offset account effectively. Over the life of the loan, this could add up to tens of thousands of dollars saved, depending on your offset balance and loan terms.
This example shows how keeping money in your offset account directly impacts how much interest you pay, making it a smart way to manage your home loan and save money.
Real Data on Brisbane’s Property Market in 2024
As of August, Brisbane’s median house price sits at approximately $825,000, reflecting steady growth over the past few years. Interest rates have remained relatively stable, hovering around 6% for most variable home loans, although some lenders offer discounts for loans with an offset account.
Considering these figures, using an offset account effectively could save Brisbane homeowners a substantial amount on their mortgage over the life of their loan.
Types of Offset Accounts: Full vs. Partial
Not all offset accounts are created equal. In Australia, you'll typically find two types: full and partial offset accounts. Here’s a quick look at the key differences.
Full Offset Account
With a full offset account, every dollar in your account works to reduce your loan balance. If you have $20,000 in a full offset account against a $300,000 loan, you'll only pay interest on $280,000.
This type of offset account is usually offered with variable rate loans and is more common with packages that come with an annual package fee. However, the potential interest savings often outweigh the cost of the fee, making it a popular choice for savvy borrowers.
Partial Offset Account
A partial offset account works similarly, but only a portion of your balance is used to reduce your loan interest. For instance, if the account offers a 50% offset, then only half of the $20,000 in your account would reduce your $300,000 loan balance—meaning you’d pay interest on $290,000 instead of $280,000.
Partial offsets can still save you money but are less effective than full offsets. They might be linked to basic home loans that come with fewer features and lower fees.
Benefits of an Offset Account
Using an offset account wisely can lead to numerous financial benefits. Here’s how:
- Interest Savings: The most significant benefit is reducing the amount of interest you pay over the life of your loan. Even small balances in your offset account can lead to big savings, thanks to compound interest.
- Flexible Access to Funds: Unlike making extra repayments directly into your loan, money in an offset account is easily accessible. You can withdraw it anytime, making it a convenient way to manage both savings and home loan repayments.
- Tax Benefits: For investment properties, offset accounts offer potential tax advantages. While the interest savings from the offset account are not taxable, the loan interest remains tax-deductible. Always seek independent advice from a financial planner on this matter.
- Loan Term Savings: By paying less interest, you might pay off your loan faster without increasing your monthly repayments. This can shave years off your loan term and save you a bundle.
Offset Account vs. Redraw Facility
Sometimes, borrowers confuse offset accounts with redraw facilities. While both allow you to save on interest, there are key differences.
Offset Account
As we've covered, an offset account reduces your loan balance by the amount in the account, leading to lower interest charges. The money is easily accessible for withdrawals, making it a flexible tool for managing finances.
Redraw Facility
A redraw facility allows you to make extra repayments on your home loan and then "redraw" those funds if needed. However, unlike an offset account, accessing money from a redraw facility can be less flexible. You might need to meet specific conditions or pay fees to withdraw funds.
Also, the money in a redraw facility directly reduces your loan balance (principal), so while it saves you interest, it might not be as easily accessible as an offset account.
Real-World Example: The Thompsons’ Experience
Meet the Thompsons, a Brisbane family who bought a home in Camp Hill in 2020 for $900,000. They took out a $720,000 home loan with a 30-year term at a variable rate of 6.2%.
The Thompsons chose a full offset account to park their $50,000 savings. Over the first four years, they maintained an average balance of $50,000 in their offset account.
By reducing their loan balance to $670,000, the Thompsons saved over $13,000 in interest during this period and reduced their loan term by nearly three years without changing their regular repayments. This case illustrates just how powerful an offset account can be in the right circumstances.
How to Maximise Your Offset Account
To fully leverage the potential of an offset account, it’s essential to approach it strategically. By managing your finances smartly, you can significantly reduce your loan interest and shorten your loan term.
Below are eight practical tips to help you make the most out of your offset facility.
1. Deposit Your Salary and Regular Income
One of the most effective ways to maximise your offset account is to have your salary and other regular income, such as rental payments or term deposit interest, directly deposited into the account.
This immediate boost to your balance reduces your daily home loan interest calculation, lowering your overall loan interest rates. The higher your offset balance, the more you save on your variable loan.
2. Make Extra Mortgage Repayments Early
Consider making additional loan repayments as soon as possible after your time of settlement. Early in your loan term, the balance is higher, and thus, the interest charges are larger.
By making extra mortgage repayments during the loan application journey, you reduce the loan principal faster, leading to substantial compound interest savings.
3. Use Your Offset Account for Everyday Spending
Integrate your personal transactions with your offset account. By using it for deposits like your salary and regular expenses such as groceries and bills, you keep more money in the account, which reduces the loan balance on which interest is calculated.
This setup helps you save on the total interest you pay over the life of your loan, even as you manage your day-to-day expenses.
4. Schedule Regular Deposits and Minimise Withdrawals
Regularly deposit any extra money, such as bonuses, tax returns, or windfalls, into your offset account. These regular deposits enhance your actual savings on interest over time.
Conversely, try to limit withdrawals. The longer you maintain a high offset balance, the more you’ll save. Remember, even small amounts add up with compound interest savings.
5. Consider Making Fortnightly Repayments
Instead of sticking to minimum repayments on a monthly basis, switch to fortnightly repayments. This small change means you’ll make one extra repayment each year, reducing the loan principal more quickly and saving on interest.
Combine this with a loan offset calculator to track your actual savings.
6. Utilise a Split Loan Strategy
If you’re uncertain about fully committing to a variable loan, consider a split loan. This loan type allows you to enjoy the benefits of both fixed and variable interest rates, with one portion linked to an offset account. It’s a way to hedge against rising rates while still leveraging the loan with offset.
7. Consult a Loan Expert for Tailored Advice
With so many options, such as investment loans, eligible home loans, and various loan features, it’s wise to seek professional advice. A loan specialist or dedicated lender can help you navigate complex lending criteria and optimise your loan offset accounts to match your personal circumstances.
Whether you need guidance on lending criteria or advice on pre-qualification, a loan expert can help tailor the right strategy for you.
8. Monitor Loan Interest Rates and Loan Features
Keep an eye on your lender's loan rate and current interest rate offers. Loan interest rates can fluctuate, especially with variable interest rates, so it’s important to be aware of any changes.
If your annual home loan package offers a loan interest rate discount, make sure you’re fully benefiting from it. Periodically use a loan repayments calculator to assess your borrowing power and ensure you’re on track to achieve your prepayment threshold.
Chat with Zest Mortgage Solutions
Need help setting up or maximising your offset account? Zest Mortgage Solutions can help. Our dedicated team offers tailored advice to help you make the most of your home loan. Call (07) 3461 6499 or visit our website to learn more.
FAQs
Can I have multiple offset accounts linked to my home loan?
Yes, some lenders allow multiple offset accounts to be linked to a single home loan, giving you more flexibility in managing your funds.
Are offset accounts available for fixed-rate loans?
Offset accounts are typically linked to variable-rate loans, but some lenders do offer them with fixed-rate loans. However, the terms might differ.
Is there a fee for having an offset account?
Some lenders may charge an annual package fee or a monthly maintenance fee for an offset account. Always check with your lender for specific costs.
Can I lose money in my offset account?
No, the money in your offset account remains yours and is not at risk. The balance only reduces your loan interest.
Do I need a minimum balance in my offset account?
There’s no minimum balance required to maintain the offset benefits, but the more you have in the account, the more you save on interest.
What’s the difference between an offset account and a savings account?
A savings account earns interest on your balance, whereas an offset account reduces the interest on your home loan by offsetting the loan balance.
How can I calculate the savings with an offset account?
You can use a mortgage offset calculator to estimate your potential savings. Many banks and mortgage brokers, including Zest Mortgage Solutions, offer these tools on their websites.
Conclusion
An offset account is more than just a place to park your money. It’s a powerful tool that can help you reduce your loan balance, save on interest, and potentially pay off your home loan sooner. Whether you’re buying a new home in Brisbane or looking to refinance, understanding how an offset account works can be a game-changer.
For personalised advice on the best home loan options for your situation, reach out to Zest Mortgage Solutions. Our experienced brokers are here to guide you through every step of your home loan journey.
Call us on (07) 3461 6499 or visit Zest Mortgage Solutions to get started.
