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Offset mortgages

What are home loan offset accounts and how do they work?

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Offset accounts

An offset account is a bank account attached to your home loan. Every dollar saved in an offset account reduces the amount of interest you’re charged. If you had $200,000 left to repay on your mortgage but saved $15,000 in your offset account, your interest charges would be calculated based on $185,000.

Through this method, you pay less interest and can repay the loan faster. However, it’s important to understand how offset accounts work and if its the right choice for your financial situation.

How do offset accounts work?

This diagram explains how Offset accounts workYou can put any income or savings into an offset account like a normal bank account, but you won’t gain any interest. Instead, the money will temporarily reduce (or offset) your loan principal (the amount of money you owe on your home loan).

By offsetting your loan principal you pay less interest. Your monthly repayments won’t change but you’ll be paying off more principal and less interest.

Putting money into an offset account is like making extra mortgage repayments, except you can withdraw the money and spend it when you need to.

Offset account example

  • You owe $150,000 on a 30-year mortgage.
  • Your interest rate is 3.00% and your monthly repayments cost $632.
  • Five years into your mortgage you put $20,000 in the offset account.
  • Now your lender charges you interest on $130,000.
  • Your monthly repayment is still $632, but you’ll repay the loan two and a half years faster.
  • This will save you $19,163 in interest over the life of the loan.

Offset account calculator

Use our calculator below to calculate the time and interest you can save on your mortgage when you put some money into an offset account.

All you need to do is enter your mortgage details, the amount you will put into the offset account and how far into your mortgage you currently are.

What if I spend the money in my offset account?

You can spend the money in your offset account any way you like. It’s your money. When you withdraw money from the account your loan principal re-adjusts and you’ll pay interest calculated on a higher amount.

Saving money in the offset is still beneficial even if you spend it later. Because your lender calculates your interest charges every day based on the loan principal. Every day you put money in there reduces your interest costs, whether you spend it later or not.

Partial vs 100% offset

Most offset accounts are linked to a floating interest rate home loan. Every dollar in the account offsets the loan principal in full. But some lenders also allow you to have part of your mortgage on a fixed interest rate and part of it on offset.

FAQs

Do my repayments get smaller with an offset account?

No, your repayments will stay the same with an offset account. What will change is the proportion of the amount of your repayment which goes towards the loan amount and the amount that goes towards interest.

Is a redraw facility the same as an offset account?

No. They can function in a similar way because a redraw facility allows you to pull extra repayments out of your mortgage. The extra repayments lower your interest (same as offset savings) and you can still use the money as required.

But a redraw facility is much less flexible or convenient than an offset account.

Can investors use offset accounts?

Offset accounts can be used with property investment loans and there are a variety of strategies that investors can use.

I heard there’s a way to use a credit card and maximise my offset savings?

Yes, there is. Essentially, you do all your spending on your credit card and have your salary paid straight into your offset account. You keep all the money there offsetting your interest. Then, when your credit card repayment is due, pay it all off.

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