Offset account: What is it and how does it work?
An offset account is an important feature useful to pay less mortgage interest and save thousands of dollars. Typically most banks offer one with their home loan products.
What is an offset account?
Offset accounts will reduce the interest payable since mortgage interest is only charged on the net balance. An offset account is a transaction account that’s linked to a mortgage account. Which means that this account could entertain:
- Debit cards
- Online banking access
- Salary credits
- Direct debits
How does it work?
How it works is quite simple. It uses the money in this account to offset your loan balance. The more money you have in the offset account, the less interest you end up paying overall.
Without an offset account you will end up paying interest on the total amount owing on your home loan. But with the offset account instead of being charged interest on the full balance owing to the bank, you’re charged interest on your home loan balance less the amount in the linked offset account.
For an example:
If you have a loan amount of $500,000 and you got $100,000 in an offset account, interest will only be payable on the $400,000 ($500,000-$100,000). Which means that interest was not paid for the $100,000 sitting in the offset account.
Will the repayments go down?
Repayments will remain the same. However what will happen is that the proportions which go towards the interest component and principal component will change. In other words, more of the repayment goes towards the
In other words, more of the repayment goes towards the actual loan amount instead of the interest since the offset account lowers the interest due on your home loan.
What products will come with an offset account?
Not all home loan products come with an offset account. Here are products that do come with an offset account:
- Variable home loan products
- Packaged home loans (with variable rates)
- Basic home loans
- Some fixed rate home loans (very limited options)
Things to consider
In addition to the above-mentioned points, it’s noteworthy to point out things which require consideration before setting up an account.
Becuase we all buy property for many different reasons, in certain situations depending on the type of strategy (i.e. negative gearing) some borrowers may require advice to ascertain suitability. Hence, think it through carefully.
Savings vs. Offset account
Generally, utilising an offset account is a better option compared to parking money in a savings or term deposit. In the current environment, savings accounts earn about 3 percent, but the offset account will offset the interest paid on a home loan (which I bet is more than 3%).
Generally, your banker or mortgage broker would set up this account as part of the service. But if you want to do it yourself it’s relatively simple. Once you establish that you are entitled to an offset account, you could simply open a transaction account and change this to an offset account. Some banks might need you to complete a different form while with others it might just be an easy switch.
Multiple offset accounts
Yes, with some banks you will be able to have multiple offset account linked to one variable loan. At St.George Bank Advantage Package Home Loan, you could have 99 offset accounts. But the catch is one account is free while the rest will cost you $5/month (unless you deposit $2000/month).
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