Including offset accounts in your home loan strategy could potentially save you thousands of dollars. Here’s a look at how they work and whether you should consider this option.
What are Offset Accounts?
Offset accounts aim to reduce the interest you pay on your home loan. They’re similar to savings accounts, but instead of earning interest, the money in the offset account reduces the loan’s principal. This means you only pay interest on the remaining loan amount, minus the balance in your offset account.
You can choose between a full (100%) offset account or a partial one. A full offset account means the entire balance in the account is deducted from your loan principal before interest is calculated each month. A partial offset account applies a reduced interest rate to an amount equal to the account’s balance. According to Realestate.com.au, the full offset account is the most popular option as it is more effective in lowering interest costs.
How Much Can a 100% Offset Account Save You?
Let’s look at an example. If your loan is $500,000 and you maintain a $20,000 balance in your offset account throughout the loan term, you can save over $10,000 by paying interest on $480,000 instead of the full loan amount. This example uses an interest rate of 5.08%.
Another advantage, according to Launch Finance, is that the balance in your offset account isn’t taxable since it doesn’t generate interest.
Are There Downsides?
You might be thinking, “Of course I want to save money, so why wouldn’t I use an offset account?” However, it’s important to understand the potential drawbacks.
The costs of offset accounts can vary, as different lenders offer different fees. Additionally, having an offset account might result in higher interest rates or fees on your home loan.
Realestate.com.au also notes that if your primary goal is to reduce your loan payments, an offset account may not be the best option. The significant benefits of an offset account are most apparent when you can make substantial deposits into it.
If you have further questions about offset accounts and whether they’re right for you, our team is here to help. Speak to a member of our team today to explore your home loan options.
