If you’re a homeowner or considering buying a property in Australia, you’ve likely come across the term “offset account.” But what exactly is it, and how can it benefit you? In this article, we’ll break down the concept of offset accounts, how they work, and the most recent updates announced from major lenders to make offset accounts more flexible, meaning you could potentially save thousands on interest over the life of your loan.
What Is an Offset Account?
An offset account is a type of transaction account linked to your home loan. Instead of earning interest like a standard savings account, the money in an offset account reduces the amount of interest you pay on your mortgage.
For example, if you have a home loan balance of $400,000 and an offset account with $50,000, the bank calculates interest only on $350,000. This can result in significant interest savings over the life of your loan and potentially help you pay off your mortgage faster.
How Does an Offset Account Work?
Offset accounts function similarly to everyday transaction accounts. You can deposit your salary, savings, or other funds into the account and use it for daily transactions like withdrawals, bill payments, and transfers. The key difference is that every dollar in the offset account works to reduce the interest charged on your mortgage.
Most lenders offer two types of offset accounts:
– Full Offset Accounts: These reduce your loan balance on a dollar-for-dollar basis.
– Partial Offset Accounts: Only a portion of the balance offsets your mortgage, meaning less interest savings compared to a full offset account.
Benefits of an Offset Account
Lower Interest Costs – By reducing your loan’s principal balance for interest calculations, you can save thousands over the life of your mortgage.
Flexibility – You can access your funds anytime, unlike extra repayments made directly to your mortgage, which may be harder to withdraw.
Faster Loan Repayment – With less interest to pay, more of your mortgage repayments go towards reducing the loan principal, helping you pay off your home loan sooner.
Tax Efficiency – Unlike a savings account where interest earned is taxable, the savings from an offset account are not considered taxable income.
Things to Consider
While offset accounts can be highly beneficial, they come with a few considerations:
Higher Fees: Some lenders may charge higher fees for loans with offset accounts.
Interest Rates: Loans with offset accounts might have slightly higher interest rates than basic home loans. Talk to your mortgage broker about your options. We have a panel of over 80 lenders to choose from.
Usage Discipline: To maximize benefits, you should maintain a consistent balance in your offset account.
Is an Offset Account Right for You?
An offset account is ideal for borrowers who have spare cash or regular income deposits and want to reduce their mortgage interest while maintaining easy access to their funds. However, if you don’t keep much money in the account, the benefits may not outweigh the potential costs.
Westpac updates offset accounts policy
Westpac has recently introduced a new feature for borrowers that will allow them to set up multiple offset accounts with no additional fee.
This comes off the back of increased demand as research indicates there has been a 37 per cent rise in offset accounts opened in the last five years. Meanwhile, there has been a 63 per cent increase in offset account balances.
Westpac’s managing director of mortgages, Damien MacRae, said the introduction of these changes was to support choice and control for borrowers.
“With interest rates top of mind for Australians, we know many customers are thinking about how to get ahead on their home loan. An offset account is an everyday bank account linked to your home loan, where every dollar in your account reduces, or offsets, the interest you pay,” he said.
“We’ve seen a steady increase in customers building up their offset balances. We will be rolling out the option for customers to set up to 10 offset accounts to offer greater flexibility in how they manage their savings, while reducing the interest charged on their home loan.
“Multiple offset accounts give you the flexibility to ‘bucket’ finances for different purposes. An example of this could be setting aside money in separate offset accounts for everyday living expenses, a holiday or emergency funds. This can offer benefits such as more visibility and control over how you allocate your money, manage your cash flow and track spending.
“Multi-offset accounts can also allow customers the flexibility to open a home loan with family or friends and still reduce their interest payments while keeping their broader finances separate.”
Research from Westpac found that 44 per cent of customers utilised offset accounts to pay home loans quicker. Another 38 per cent liked the flexibility it provides and 25 per cent used it to improve their cash flow management.
Further research found that 71 per cent of Australians who have an offset account with their mortgage use it to reduce their home loan.
“For example, with an offset account balance of $10,000 and a further $100 deposit added every month, a customer can save more than $110,000 in interest on a 30-year home loan of $500,000. This would also reduce the loan term by nearly three years plus,” said Westpac.
NAB also launches multiple offset capability
NAB has also announced a new feature that will allow brokers to assist home owners in saving hundreds of dollars annually on their mortgage interest by offsetting their loans across up to 10 different accounts.
The demand for offset accounts has surged in recent years, with around 70 per cent of new home owners now opting to offset their loans. As a result, the total balance of offset accounts has grown by 65 per cent to reach $48 billion.
NAB executive, Adam Brown, said that the introduction of multiple offsets was in response to both broker and customer feedback. This new option will enhance home owners’ ability to manage their savings and provide brokers with a fresh tool to add value to customer discussions.
“Multiple offsets support the popular ‘bucketing’ strategy that many customers use to manage their savings and ease cost of living pressures,” Brown said. “Customers who like to distribute funds across several accounts will no longer need to make a sacrifice between bucketing their savings and having it all in one account doing the heavy lifting on interest. “They’re perfect for customers who are looking to make every dollar count.”
The new feature allows customers to restructure their current accounts into multiple offset accounts with the ability to view how much they are saving on interest over the life of the loan.
Offset accounts are a powerful tool for Australian homeowners looking to save on mortgage interest and gain financial flexibility. If you’re considering this option, compare different lenders and loan products to find one that suits your needs. Consulting a mortgage broker can also help you determine whether an offset account aligns with your financial goals.
Disclaimer: The information provided on this blog is for general informational purposes only and does not constitute financial or professional advice. While we strive to provide accurate and up-to-date information, mortgage laws and regulations can change, and individual circumstances may vary. We recommend consulting with a qualified financial advisor or mortgage broker to assess your specific situation and needs. Base Home Loans is not responsible for any actions taken based on the content of this blog. Always conduct your own research and consider seeking professional advice before making financial decisions.
