A Beginner’s Guide To Offset Accounts

What if we told you that there was a way to pay less on interest while still saving money? Needless to say, offset accounts can be worth their weight in gold. 

A Beginner’s Guide To Offset Accounts

With homeowners around the nation feeling nervous about rising interest rates, it’s only natural that many have started researching ways to pay less on what feels like an unavoidable expense. Even an increase of 1% can see repayments lift by hundreds of dollars each month – a prospect nobody relishes. 

However, offset accounts are proving to be an increasingly popular way to pay less interest on an existing home loan. While lending providers and mortgage brokers often tout this feature as one of the key “bells and whistles” that separate loan products, not all home loans offer such a feature. When properly deployed, a well oiled offset account has the potential to save homeowners thousands of dollars in repayments, but what’s the catch?

Understanding How Offset Accounts Work 

In simple terms, the aim of the offset accounts game is to use up to 100% of the balance of a linked transaction account to “offset” – or effectively reduce – the portion of your home loan that is accruing interest. As an example, if you currently had a mortgage with a balance of $350, 000 owing, but also had $50, 000 in a linked 100% offset account – you would only pay interest on $300, 000 of your balance. 

Thus, instead of having that $50, 000 earning interest in a separate savings account, by placing it in a linked offset account to your mortgage, it’s a means to pay less interest on an existing mortgage. While the loan repayments remain the same, the payments come off the principal of the loan and not interest, ultimately saving consumers thousands of dollars over the lifetime of their mortgage. 

When making repayments on your home loan, you’re usually paying both the principal of the actual loan, plus interest. Offset amounts can make the loan technically “smaller”, offering borrowers a chance to pay their loan off faster. In addition, Australians pay tax on any interest earned from a savings account or term deposit. If you have a large amount of savings, transferring this to an offset account is also an effective way to reduce the amount of tax you’re paying – an opportunity almost everyone would happily jump at. 

If you’re unfamiliar with the concept of offset accounts, there are two primary formats available in Australia. A 100% offset account “offsets” the interest rate payable on the mortgage, by the full balance of the account. This option may be available for both variable or fixed home loan rates, but ultimately depends on your lending provider, their products and their policies.

In comparison, partial offset accounts only offsets your mortgage by a portion of the offset account balance. What this means is that the higher the percentage of the offset account, the more consumers can save in interest on their mortgages. An example of this at work is if you had a loan of $350, 000 with $50, 000 in a linked 50% offset account, you would only pay interest on $325, 000 of your balance. As a general rule, this setup is more common for fixed rate home loans.

If you’re feeling anxious about how future interest rate rises will potentially affect you or how you could best leverage an offset account, it’s a good idea to make an appointment with your lending provider or mortgage broker. In simple terms, a home loan health check is a free discussion or “check up” aimed at fine tuning all the complexities involved with your current mortgage, and can allow consumers to explore their options linked to offset accounts. 

Partnering With The Home Loan Professionals 

Navigating the complex world of home loans has long been regarded as stressful, frustrating and time consuming – but if you can find the right advice on sourcing how mortgages work, then the good news is that it doesn’t have to be.

Since their inception in 2012, the team at Madd Loans have worked tirelessly in providing over 2,000 Queenslanders with finance options to help turn their dreams into reality. With the entire brand being built on referrals, owner George Samios takes great pride in making the loan process both fun, educational and stress free – and he has a swag of awards to prove it.

If thinking about your financial future strikes a chord with you, then it might be time to speak to a professional. Whether you’re chasing mortgage solutions or a financial fairy godmother, the team at Madd work together as a collective to turn your goals into reality.

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