When you apply for a home loan, give some consideration to your overall account structure. Banks offer a range of products that go beyond fixed vs variable home loans. Choose wisely and you can save some serious money.
One such feature is the offset account. Used correctly, it can reduce your interest payments by thousands of dollars over the life of the loan, with zero effort on your part.
What is an offset account?
An offset account is a transaction account which is linked to your home loan. You can make deposits and withdraws from it as you would your regular account, the main difference is that holding money in it over a period of time can actually reduce the amount of interest charged on your home loan. This is because it ‘offsets’ the amount payable on the loan by counting the money in that account towards the balance.
For example, you might owe $200,000 on your home loan. However, you’re saving up for a renovation and have $30,000 in your offset account. Your lender calculates the interest owing as if your home loan is $170,000 ($200,000 - $30,000). The difference is significant: $85 per month on a fixed rate loan at 3.69%. If you achieve the same saving every month, you’ll have saved around a thousand dollars on interest by the end of the year.
Note that you don’t get that money back in your pocket, at least not immediately. Most mortgages have a fixed monthly (or fortnightly) repayment amount. Of that amount, a portion goes towards interest and the remainder towards paying down your principal. If the interest portion is reduced by an offset account, a larger portion goes towards the principal. In our above example, you would be paying an extra $1,000 towards the principal per year, meaning you’ll own your home sooner.
Not all offset accounts are 100% offset. You can choose a product that offsets a portion of your balance instead. Some lenders only offer 100% offset accounts for variable rate loans, while a minority also offer the option for a fixed rate loan. As with everything, it’s the overall product that you need to consider.
Unlike a savings account, when you hold money in your offset account over an extended period of time you can reduce the amount of interest charged on your home loan. The more you deposit and the longer you keep it there the less interest you’ll pay.
What is a redraw facility?
A redraw facility shares some common elements with an offset account, but there are also some differences.
This feature allows you to put extra money into your home loan, and then withdraw it when needed. If you’re saving for something, like our renovation example above, the ideal approach is to save that money into your home loan, and then redraw it down the track. Some people prefer this option, because it separates your savings out from your everyday expenses.
As with an offset account, the interest on your home loan is calculated as the balance less the amount you have in redraw.
However, you should be aware that the money in a redraw facility isn’t always as readily available as an offset account. Some lenders require up to two days’ notice to access redraw funds. There may also be limitations on the amount you can redraw, both as a minimum and maximum amount.
If you think you might need to lay your hands on your money in a hurry, or just want more flexibility this might not be the ideal option for you.
If you’re in the midst of paying off a mortgage and are feeling comfortable, you might decide to make your repayments a little higher than the minimum. But if you hit a curve ball, a redraw facility will give you access to the extra money you’ve deposited, so you can withdraw it as you need. Featured here: Kensington Grand, Orana Estate, Clyde North.
How can you get the most from your offset or redraw facility?
Interest on home loans is calculated daily. Therefore, the longer the extra money stays in your account, the more interest you’ll save. To maximise this feature:
How to choose the right product for you
Offset accounts and redraw facilities are only part of the overall picture. When you’re choosing a lender, take into account the interest rates on offer, any associated fees, and potentially restrictive terms and conditions. If in doubt, speak to a mortgage broker for some expert advice.
You can learn more about which loan structure is right for you here.
Once you’ve set up your offset account, there are some ways you can maximise its benefit by directing your money into one place and keeping it there for as long as possible. Consider having your salary paid into your offset account, and using a credit card for monthly expenses.