Offset is a feature of many variable-interest loans in Australia. Having an offset facility means borrowers can save significant amounts of money in repayments over the life of a loan. But offset doesn’t work for everybody. Find out if having a loan with offset is right for you.
Offset explained
An offset account functions almost the same as a regular savings or transaction account. You can withdraw cash, link a credit card and do all the regular things you’d do with a typical savings account. The big difference is that the account is also linked to your home loan, and your loan debt (and therefore your interest payments) is reduced by the amount of money in your offset account.
For instance, if your home loan is $600,000 and you’re paying 5% interest, your repayments on a 25-year loan will be $3508 per month. Due to interest (and assuming it stayed at 5% for the life of the loan) your total repayments will be $1,052,262 over 25 years.
But if you also have $50,000 saved, and your savings are linked to your loan in an offset account, the interest you pay will be calculated on $550,000. The $50,000 in savings is treated as if it was already paid into your loan.
In this case, you’d save almost $110,000 on total repayments, and shave 2½ years off the loan. Nice!
If you were also able to tip in a bit extra on repayments, the savings add up quickly. For example, adding $200 a month to your repayments will end up saving you around $144,000 and 4½ years off the loan. Even better!
More offset detail
- Offset loans are typically only available to people with a variable-rate loan. If you have fixed your interest rates, you’ll miss out. Some people prefer the certainty of a fixed rate loan.
- Savings in your linked offset account are available for you to access the same as a regular transaction account. Even though it’s counted towards your loan balance, there’s no extra fees or conditions on withdrawing your money.
- If you have a loan with a redraw feature, you can still access any extra amount you’ve already paid off your loan, no matter if it’s a basic or offset loan. Read more about redraw on a home loan.
- Note that if you’re an investor with as interest-only loan, the actual amount of monthly interest you pay will be less with an offset account. The more cash you have in your offset account, the less interest you’ll pay.
Fees and rates
There is an annual cost associated with offset loans; usually around $400. Offset loans also come with a slightly higher interest rate than the cheapest variable rate offered by your lender.
Basic loans without offset are also available with no application fee at many banks and other lenders. So you’ll pay higher fees and a higher interest rate with offset.
Without offset, since your savings are not being counted against your loan, you lose out on the reduced monthly interest charge (and the reduced loan term) you would receive with an offset account.
So is it worth it?
Basic or offset?
Choosing the best loan type depends on whether the potential savings from offset are more than the amount of extra fees and interest you’d pay with the offset facility.
Offset works best for borrowers with a regular income and the ability to maintain a healthy transaction account balance, while also repaying their loan on time.
The potential savings we’ve outlined don’t take into account annual fees. These fees vary from lender to lender, but shouldn’t be much more than about $400 or $500 a year. In the scenario we’ve discussed ($600,000 loan, 5% interest, 25-year term), it’s easily worth getting an offset loan.
But if your finances are very tight, it might not work out that well. If you can only maintain $2000 in savings, you’ll save around $7000 over the life of the loan, but the annual fees will be more than that. Not good.
Talk to an expert mortgage broker
The offset feature suits borrowers with savings that never dip below around $10,000. There are lots of variables here, including future earning capacity, other investments and even plans for having a family.
In any case, whether it is a straight variable home loan or one with the offset feature, we can explain the numbers, track down a great loan and even help with application forms to get you into a home quickly, saving you time and hassle.
Our service is always free for you. We never charge our clients. Of course, you’ll still have to pay any lender fees and charges if you do take out a home loan.