The world of home loans is filled with specialist jargon you may or may not be familiar with. But if there’s one phrase someone looking to buy a property should make it their business to understand, it’s ‘offset account’. Why? Because if you’re in a position to do so, using one or more offset accounts could save you thousands over the life of your loan.
In this article, we take an in-depth look into how an offset account works, the potential benefits of using one, factors to consider before setting one up, and more.
What is a mortgage offset account?
A mortgage offset account is a transaction account linked to your home loan. While you can make deposits and withdrawals like any other transaction account, the difference is that the balance is ‘offset’ against the balance of your home loan. This means you only pay interest on the balance of your home loan minus the balance of your offset account.
We appreciate that this may still be a little confusing, so let’s look at an example.
How does an offset account work?
If you had a home loan balance of $500,000 with $40,000 sitting in an offset account, you would only pay interest on a home loan balance of $460,000 (i.e. $500,000 minus $40,000). Depending on the amount you keep in your offset account, this could save you a substantial sum over the life of your home loan and help you pay it off sooner.
To get an idea of what this might mean for you, why not crunch some numbers with our home loan repayment calculator?
Benefits of a mortgage offset account
The main reason to use an offset account is to reduce the amount of interest payable on your home loan. But there are a number of additional benefits worth considering.
- Reducing your tax bill
Interest earned on savings is taxable. However, any saving you make on home loan interest as a result of money in an offset account isn’t, as it’s not counted as income.
- Increased savings over time
Although an offset account doesn’t earn interest, the amount you’ll save over the life of your home loan is comparable to, and may even be greater than, the interest you’d earn if your money were in a savings account instead.
- A convenient source of funds
As we mentioned earlier, an offset account is just an everyday transaction account at heart. This means it’s a significantly cheaper and more convenient source of funds should you find yourself short than, say, a personal loan or credit card.
Having said this, it’s worth repeating that the less in your offset account, the less you save on home loan interest.
Factors to consider
While an offset account will normally save you money, there are a couple of caveats to be aware of.
- Fees outweighing savings
Some lenders charge monthly or annual fees for home loans with a linked offset account, while others charge for the offset account itself. And there’s often an establishment fee to consider too. It’s definitely a good idea to do your sums in advance to avoid paying more in fees than you save in interest.
How to apply for an offset home loan
To apply for a Great Southern Bank Offset Variable Home Loan, you must be at least 18 years old and a permanent resident of Australia. There are also different eligibility criteria depending on whether you’re an owner-occupier or an investor.
When it comes to applying, you will also need:
- Proof of identity, such as a passport or driver’s license.
- Details of your income and expenses.
- Financial details, including what you own and what you owe.
- If you are applying with another person, both applicants need to be present.
You can either apply online or, if you’d rather talk to someone, give us a call on 133 282. If you’re more of a face-to-face kind of person, don’t worry. You can always pop into your local branch for a chat.