If you’re thinking about getting a home loan, it’s important to understand the optional features you may be offered. An offset account is one of those features. It’s important to understand what an offset account is and its pros and cons before you decide whether to get one or not.
What is an offset account?
An offset account is an everyday savings and transaction account. Its balance is offset (subtracted) from your home loan balance when your home loan interest is calculated.
For example, if you have $20,000 in your full offset account and you owe $430,000 on your home loan, you’ll only be charged interest on a home loan balance of $410,000 (i.e. $430,000 less $20,000).
Some lenders allow you to subtract your total offset account balance from your home loan, while others only allow a partial offset.
What are the advantages?
- If you have a significant amount in your account, this can significantly reduce the amount of home loan interest you pay. This in turn can allow you to pay off your home sooner.
- You won’t earn interest and therefore won’t pay any tax on your offset account balance. Instead, it will just reduce your interest charge on your home loan.
- You can arrange to have your entire salary put into your offset account and then take advantage of the interest-free period on your credit card.
- They are more flexible than a redraw facility because they allow you easier access to your money.
- They encourage you to save money.
What are the disadvantages?
- If you don’t have a significant amount in your offset account, you won’t save much interest on your home loan. Many lenders charge a fee for providing an offset account, so it may cost you more than the interest you save if you rarely have a lot of money in the account.
- Some lenders may charge a higher interest rate for providing a home loan with an offset account.
How much can you save?
This depends on how much you owe and how much you regularly have in your account.
What should you look for in an offset account?
- Low (or no) account fees
- A low accompanying home loan interest rate
- A full offset facility (rather than partial) so you can save the maximum amount of home loan interest possible.
The bottom line
Whether or not you should get an offset account depends on your individual financial situation. The pros need to outweigh the cons for one to be worthwhile for you.
How we can help
At Wisebuy Investment Group in Newcastle, our experienced and licensed brokers can help you to get the right home loan for your specific needs. And best of all, our service is free!
Contact us today for an obligation-free chat to find out more. We’d love to hear from you!