Are You Making This Mistake with Your Offset Account?

Offset accounts are known for their ability to save money, but is the balance of your offset account high enough for it to deliver results?

An offset account is a transaction account linked to your home loan. The money in this account is deducted against the balance of your loan, reducing the amount of interest you pay. For example, if you have a home loan worth $500,000 and $30,000 in your offset account, your loan interest will be based on a balance of $470,000. On an interest rate of 5% over 30 years, this could amount to a saving of $118,000.

What if you had a much smaller balance in your offset – say $5,000? The good news is that you would still save on your monthly interest repayments. In fact, every cent in your offset account helps reduce the interest payable because your balance is offset daily.

The downside is that a smaller balance has less impact on reducing the amount of interest you pay. This means that the savings you make with your offset might not be high enough to cancel out the fees, conditions or higher interest rates that are often associated with this type of account.

Do your comparison research

Consider how much money you are likely to be able to keep in your offset account at any one time. Then use an online offset home loan calculator to work out the savings this will generate.

If you don’t consistently keep a large sum in your offset account, you might find the fees outweigh the interest savings. If you do keep a consistently large balance, your offset account can bring considerable benefits. Speak to your mortgage broker about the pros and cons for your individual situation.

Home loans with free offset accounts

Not all home loans charge extra for offset accounts. If you have a ‘free’ offset, you can avoid an initial fee, but you may find there are fees for different transactions, ATM use or to receive statements.

It’s also important to ensure that the free offset account is a 100% offset account. With the less effective partial offset account, only a portion of your transaction account balance is being deducted from the balance of your home loan.

How to maximise the amount in your offset

An offset account gives you the flexibility of being able to deposit funds at any time and withdraw them via ATMs and EFTPOS transactions.

This means it is an easy process to link your offset to your home loan and have your salary paid into it, thus maximising the amount in your offset. Another option is to pay for everyday purchases with a credit card and then pay off your credit card balance in full each month by the due date.