Offset accounts are one of the smartest tools Australian homeowners can use to reduce the amount of interest paid on a mortgage. They look like regular bank accounts, but they’re connected to your home loan in a special way. If used correctly, an offset account can help you pay off your mortgage faster while also boosting your savings. In this article, we’ll explain how offset accounts work, how to set one up, and how they compare to redraw facilities so you can choose the best option for your finances.
What Is an Offset Account and How Does It Work?
An offset account is a transaction account linked directly to your mortgage. Instead of earning interest on your savings, the money in this account is ‘offset’ against your home loan balance. This means your bank calculates how much interest you owe based on your home loan amount minus the money in your offset account. For example, if you have a $400,000 mortgage and $50,000 in your offset account, the interest is only charged on $350,000. The more money you keep in your offset account, the less interest you pay on your home loan.
Most offset accounts are 100% offset, which means every dollar in the account reduces your mortgage interest. Some banks offer partial offset accounts, which only offset a portion of the interest. Full offset accounts are more beneficial, especially if you’re serious about paying off your home loan quicker and saving money in the long run.
Why Offset Accounts Are Beneficial for Homeowners
The big advantage of an offset account is interest savings. By reducing the part of your loan balance that is used to calculate interest, you end up paying less over the life of your loan. That means you’ll also pay off your mortgage faster. Additionally, an offset account gives you flexibility because the money in the account is not locked away. You can still access your funds when you need them, just like with any regular transaction account.
Offset accounts also offer a more tax-effective way to store savings. Since the interest savings reduce mortgage costs instead of earning interest as income, you’re not taxed on the money like you would be with a regular savings account that earns high interest.
How to Set Up and Manage an Offset Account
Step 1: Open a Home Loan with Offset Feature
To use an offset account, you need a home loan that includes an offset account feature. Not all home loans offer this, so you’ll need to compare different lenders and loan types when you apply. Make sure to ask your lender whether the offset is full or partial and if there are any fees.
Step 2: Link a Transaction Account
Once your home loan is approved, the lender will provide an offset account that works like a regular transaction account. You can set up direct debit, deposit your salary, and make purchases or withdrawals from this account.
Step 3: Deposit Regularly and Keep It Funded
To make the most of your offset account, aim to keep as much money in it as possible. Consider depositing your salary directly into the account and use a credit card (paid off monthly) for daily spending so the money stays in the offset account longer, reducing interest.
Step 4: Monitor and Adjust
Review your offset account regularly. Try to build up savings in the account and avoid unnecessary withdrawals. Some people even use budgeting apps to track spending, making it easier to keep more funds in the offset account.
Offset Account vs. Redraw Facility: Which Is Better?
Both offset accounts and redraw facilities help reduce your home loan interest, but they work in slightly different ways. In a redraw facility, you make extra repayments directly on your mortgage. Later, you can “redraw” the extra amount if needed. Like offset accounts, this helps you reduce your interest payments because the loan balance is lower.
The key difference is flexibility and ease of access. An offset account is easier to access since it works like a normal account. A redraw facility may take longer for funds to be available, and some lenders place limits or fees on redrawing money.
Another difference is how the money is treated. Funds in an offset account sit in a separate account, while redraw money is part of the loan. This may matter if you plan to turn your property into an investment, as redraws may cause tax complications, while offset savings generally maintain clearer tax records.
If you prefer flexibility, easier fund access, and better budgeting, an offset account is the better choice. If you’re committed to leaving extra payments untouched and want a more hands-off approach to reducing debt, a redraw facility could work for you.
Maximizing Your Savings Using an Offset Account
To get the biggest benefit from your offset account, develop smart financial habits. Deposit your income straight into the offset account and pay your bills or use your credit card after your payment cycle, ensuring money stays longer in the offset. Avoid leaving idle money in savings accounts earning low interest—transfer it into the offset instead to cut down mortgage interest faster.
Even relatively small balances in your offset account can generate big savings over time. For example, having $10,000 in your offset account could save thousands in interest over the life of your mortgage, depending on your interest rate and loan amount.
Conclusion
Offset accounts are powerful tools for reducing home loan interest and can make a big difference to your finances over time. By understanding how they work, keeping the account well-funded, and using it as your main transaction account, you can boost your savings and pay off your mortgage years earlier. If you’re comparing your options, offset accounts generally offer more flexibility than redraw facilities, making them a great choice for many homeowners. Take the time to explore your mortgage options carefully and see how an offset account can fit into your financial plan.
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