Who wouldn’t want to save on home loan interest and pay off their mortgage faster? Homeowners are increasingly turning to offset accounts to do just that. So today we’ll look into whether an offset account could benefit you.
The recent RBA cash rate hike has led homeowners to embrace a variety of strategies to ease the rate pain, and it turns out one of the most popular options is a home loan offset account.
One of the big 4 banks, NAB, says it is seeing “offset accounts surge” as homeowners, especially younger borrowers, look for low‑effort ways to beat rising rates.
According to NAB, three-quarters of its home loan customers now use an offset account.
While homeowners aged 40 to 60 remain the biggest users of offset accounts, NAB says that among customers aged under 35, the number of offset accounts linked to new home loans has nearly doubled compared to last year.
Let’s dive in to understand the appeal of offsets, the potential savings to be made, and who home loan offset accounts may be suited to.
A bit of background first.
An offset account is an everyday account linked to your home loan.
You don’t earn interest on money in the offset account. Instead, you save by paying less interest on your home loan.
That’s because the balance of the offset account is deducted from (or ‘offset’ against) the value of your home loan when loan interest is calculated.
For example, if you have a $500,000 mortgage balance and $20,000 in an offset account, you’ll only be charged interest on $480,000.
Your monthly home loan repayment amount will stay the same – it’s just that more of your monthly repayment will go towards paying off the principal, rather than towards interest.
When this pattern is repeated month after month, the savings can potentially start to stack up.
Over time the balance of your home loan may be paid off quicker, which further helps to lower the monthly interest charge.
In this way, an offset account has the potential to be a way to pay off your loan sooner.
The interest savings generated by an offset account will depend on the size of your home loan, the balance of the offset account, and your loan rate.
Here’s an example of the possible savings that we’ve put together using one bank’s offset calculator (most banks have them readily accessible online, just google ‘offset account calculator’).
Let’s say you have a $500,000 mortgage with a 30-year term and an interest rate of 5.99% (comparison rate of 6.37%), plus $20,000 always sitting in your linked offset account.
Over the life of the loan, the impact of the offset account could cut $90,571 off your total interest bill and see you mortgage-free 2.5 years ahead of schedule.
What matters is that you talk to us to know exactly how much you could save with an offset account.
There’s a lot to love about home loan offset accounts.
But they may not be the ideal option for every borrower.
The more you have in an offset account, the greater the savings on loan interest. So, you need to be able to resist the urge to dip into the account too often – especially as the funds are usually available at call.
One way around this is to look for a lender that offers multiple offset accounts linked to the same home loan. This way, you can use one offset account for everyday money, and the others to save for personal goals – all while saving on home loan interest.
The other aspect to consider is that offset home loans can come with higher rates and fees. If you have only limited cash savings, you may save more with a lower rate without features such as offset accounts.
Lastly, it’s always worth weighing up whether any money you allocate towards your offset account and paying off your home loan sooner could be better utilised by investing towards your future in other ways.
Offset accounts can be one interest savings hack. But you can’t simply add them to every home loan account – adding them can often mean refinancing.
Fortunately, you could potentially double up on cutting the amount of interest you’re paying by refinancing to a lower rate home loan at the same time.
If you’ve had your old loan for a while, it’s worth calling us to see if you could save by refinancing to a loan with a lower rate and/or features better-suited to your needs.
The main point is that you don’t have to just wear a higher interest rate.
Call us to find out if an offset account is a good fit for you – and other strategies that could potentially help you save on home loan interest.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to your circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
Paul da Silva
Director & Senior Mortgage Advisor
