▶ Watch the video, Part 1: https://www.facebook.com/reel/1963199491096353/
▶ Watch the video, Part 2: https://www.facebook.com/reel/1311108610429613/
Offset accounts are one of the most talked-about home loan features, and for good reason. But as we said in our two-part Advanced Borrowing Series, they only save you money if you manage them properly. Here’s the short version.
How an offset account works
An offset account is a transaction or savings account linked to your home loan. Each day, the balance in the offset is deducted from your loan balance before interest is calculated.
For example, if you owe $500,000 and have $20,000 in a 100% offset, you’re generally charged interest as if you owed $480,000. Your money stays available, and instead of earning taxable interest, it reduces the interest you pay on your loan.
The catch: offsets can cost more
Loans with an offset feature often come with a higher interest rate, a package fee, or both, compared with a basic no-frills loan. That means the offset has to earn its keep before you’re ahead.
The break-even point
As we explained in Part 2, to actually break even you need a sizeable balance sitting in your offset. As a rough guide, that’s around $10K for a $500K loan, or $20K for a $1M loan.
If you don’t consistently keep that kind of money in the account, the extra cost of the loan could outweigh the interest you save. The exact break-even point depends on the rate difference and the fees on the specific loans you’re comparing, so treat these figures as a guide, not a rule.
Who offsets tend to suit
Generally, an offset account may be worth considering if you:
- keep a healthy savings buffer or emergency fund you’d like to keep accessible
- have your salary paid in and leave it there for as long as possible
- are saving for something specific but want your money working in the meantime
- have an owner-occupied loan now that may become an investment loan later. Talk to your accountant here, because how funds are held can matter for tax.
Offset vs redraw
A redraw facility also lets you reduce interest by paying extra into your loan, and loans with redraw are often cheaper. The differences are in access and structure. Redraw rules vary by lender, and money you’ve paid into a loan is treated differently from money held in a separate account. If your loan is or may become an investment loan, get tax advice before choosing between the two.
Partial offsets and multiple accounts
Not all offsets are equal. Some are partial, meaning only a percentage of your balance offsets the loan. Some lenders let you link several offset accounts, which can help with budgeting. Check the details before you commit.
Is an offset right for you?
The honest answer is that it depends on your balance, your habits and the cost difference between the loans available to you. An offset is a great tool for some borrowers and an unnecessary expense for others. Our team can compare options with you and help you work out where your break-even point sits.
This is general information only and does not take into account your objectives, financial situation or needs. Speak to a broker before acting.