Offset accounts - what are they and do I need one?

Written on the 27 October 2013 by Adrian De Fazio

It is easy to get confused with the sheer quantity of mortgages available. Do I fix my interest rate or do I ride the rollercoaster of a variable rate? Do I link my loan to an offset account? Do I undertake a loan with a honeymoon rate? There is so much to understand!

I’m going to look at offset accounts in this article. Hopefully by the end of it, you have a better understanding of what they are and if you think one would be suitable for you.

An offset account is a transaction account that is linked with your loan (usually a variable rate loan). The balance in the offset account works to “offset” (hence the name) the balance of the loan, and therefore reducing your interest payable.

For example, if you have a loan balance of $300,000, and your offset account balance is $10,000, interest will only be calculated on $290,000 on your loan. Effectively, this means that you earn interest on the money in your account at the equivalent rate of the loan – which is usually higher than other savings accounts and term deposits!

Naturally, there is no such thing as a free lunch, and banks will recoup the money you save by charging you a higher interest rate for an offset account than you otherwise would pay for a “no-frills” loan. However, when used correctly, an offset account can be used to your advantage.

From the above example, it is plain to see that the more money you have in your offset account, the less interest you will pay. Using an extreme example, if you have $150,000 in your offset account, and a $150,000 loan balance, your loan repayments will be purely principal! This means that offset accounts are very well suited to homeowners who are very good at saving, as they are likely to have an increasing offset balance.

Further, an offset account is, in itself, an enforced saving mechanism. Remember, for every dollar in your offset account, your interest payable to the bank is reduced. This might have the psychological effect of making you reconsider some of your discretionary spending in favour of increasing the offset balance and reducing your interest bill.

Remember, it is important to weigh up your options to see if an offset account would really work for you. Everybody is different, and different loans will suit each person. But if you think you have the discipline to maintain a healthy offset account balance, it may be worth seriously considering.     

Author: Adrian De Fazio
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