What is an offset mortgage account?


July 15, 2020

Smiling woman considering a mortgage with offset account while holding model of a house

When deciding on a home loan provider, it could be beneficial to consider various features that could come with your home loan package. Banks, non-banks and online lenders offer various features that could assist their customers in paying off their homes as fast as possible and save money in the process.

Skimming over each of the features while comparing the different home loan providers, you may find that one of them could be an offset mortgage account. Whether you are starting from scratch or refinancing your home, you may be asking yourself, what is an offset mortgage account and is this something I need to consider?

Let’s dive into the facts.

In basic terms, an offset mortgage account is an everyday bank account that is linked to a home loan. Those who have an offset mortgage account can deposit their salary and savings into this account. This balance is then offset against the amount owing during the relevant period.

This means that borrowers with an offset mortgage account are only paying interest on the difference between their loan and the balance in the offset account during that period.

An offset mortgage account can function in a similar way to a high interest account. Rather than earning borrowers interest on their savings, it may save them interest on their home loan repayments. This could result in borrowers paying off their home loan faster.

These accounts could offset up to 100% of the account’s balance. This could mean borrowers could pay less interest than they would if they didn’t have an offset mortgage account.

To put this into perspective, here is an example. Let’s say someone has a home loan of $450,000. If they have $40,000 in their offset mortgage account, they will only be charged interest for $410,000, rather than their full home loan.

If a borrower chooses to keep their monthly repayments the same when opening an offset account, due to the reduced interest it can allow borrowers to pay their home loan faster

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There are generally two types of offset mortgage accounts. These are balance offset accounts and interest offset accounts. 

There are two different versions of balance offset accounts, which are fully offset accounts or partially offset accounts. A fully offset account allows borrowers to use 100% of their balance to offset their home loan. A partially offset account sees lenders only charge interest to part of the balance in this account, instead of the full amount.

An interest offset account, on the other hand, offsets the interest payable on the mortgage by the interest earned in the account which may be less than the interest rate of the mortgage. Due to this, these accounts are often less favourable and less common than balance offset accounts.

There are a number of home loan providers who offer home loans products with offset mortgage accounts included. Some of these providers include UniBank, Bankwest, NAB, ING, Westpac, Suncorp Bank, ME Bank, Heritage Bank, and Resimac.

These deals can be seen and compared via comparison websites so borrowers can discover which could be best for their unique situation.

A redraw facility is an account that allows borrowers to redraw any extra repayments they have made towards their home loan. These accounts are sometimes confused with offset mortgage accounts.

One important difference is in the ability to redraw from these accounts. Offset accounts operate similarly to a savings account, and may allow same day redraw to borrowers, whereas redraw facilities may not. Redraw facilities may also see borrowers charged with a redraw fee. 

Offset accounts require self-discipline as its value depends on borrowers saving money rather than spending it. Borrowers will usually need to apply in advance before taking money from their redraw facility, which also requires discipline. 

Pros

Could pay off home loan faster

Borrowers with an offset account could be paying less interest on their loan during the period of their package. During this time, they will also be paying the same amount in terms of monthly repayments. This means that they could pay their loan off faster without extra interest holding them back. Borrowers could also link multiple offset accounts to their home loan, which allows them to maximise the existing benefits.

Could make your home loan simpler to manage

Having an offset mortgage account could make it easier to manage your home loan in terms of managing interest payable. It could also be easy to manage the offset mortgage account itself by linking it to a standard savings account where the borrower’s salary is deposited. This way, it can automatically save into your offset account, allowing them to pay off their mortgage even faster. 

Extra easily accessible funds

One of the great things about an offset mortgage account is customers can withdraw money from this account if they need it for other urgent expenses. As mentioned previously, this may be easier to do from an offset account than a redraw facility and may not require a withdrawal fee. Any amount withdrawn can also be redeposited when possible.

Cons

Higher interest rate

Home loans with an offset account may end up having a higher interest rate than those that do not. Different lenders may offer different home loans with different benefits and interest rates. For this reason, it’s important to compare a range of home loans and lenders before making a decision.

You might also like: How can I take advantage of low interest rates?

Additional fees

Borrowers may be charged additional fees for home loans with offset mortgage accounts. This may include a transaction fee if a borrower decides to take money out of their amount or account-keeping fees for the period that they are holding the account. Although these fees may be low, it’s important to keep an eye on this so they don’t come as a surprise later on.

Cannot earn interest

An offset mortgage account differs from a regular savings account in terms of earning interest. While a savings account may allow account keepers to earn money through interest, offset mortgage accounts do not allow borrowers to do this based on their savings.

Are you eligible?

Those with a fixed rate home loan will not be eligible for offset account linking until the fixed rate period ends and becomes a variable interest rate. It also may depend on the type of loan you have, so be sure to check with your lender.

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What percentage of the balance is offset against your home loan?

You will need to check what percentage of your offset mortgage account balance will be offset against your home loan. As mentioned previously, some offset mortgage accounts only use part of your balance to offset against your home loan. If you want a fully offset account, you will need to ensure that this is possible.

Are there any fees associated with the account?

As mentioned, there could be fees associated with an offset mortgage account, including a transaction fee or account keeping fee. It is important to note how high these fees are in comparison to home loans that do not have a linked account included. Looking at the comparison interest rate compared to the actual interest rate can help when comparing loan products.

What are the limitations of the account?

Borrowers will need to consider whether there are any limits on the balance of the offset mortgage account. There may be a minimum or maximum to how much money can remain in that account at one time. 

Although some offset accounts may allow you to link multiple offset accounts to your home loan, this isn’t always possible. If you would like to do this, you will need to check if you are able to do this before deciding on a package.

Also, it’s important to ensure that you will be able to withdraw your money in the way that you normally would from your savings accounts, whether that be via your debit or EFTPOS card, BPAY, direct debit or even through an ATM or branch.

Will an offset mortgage account impact my tax?

It’s also important to find out if having an offset mortgage account will affect your tax. Because you don’t earn interest on an offset mortgage account, you don’t need to pay tax based on this interest. This means the interest payable may be reduced.  

Whether it’s worth getting an offset mortgage account is based on your individual situation, however, it may be something you should consider while comparing home loans. Don’t forget to ask the right questions so you know how much of the balance is offset against the home loan and what fees you may expect.

Sources:

Words by Jessica Testa


Written by Refinancing.com.au


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