An offset account is a bank account linked to your home loan which operates just like an everyday banking or savings account. You will generally have ATM access to your account and be able to make internet banking transactions and payments like any other savings account. An offset account is a feature that can be added to a variable rate home loan, but not all loan products will have this feature.
How does it work?
When you borrow to buy a home you are charged interest on the amount that you borrow. If you have any cash in the bank and you earn interest it will be most likely be at a lower interest rate than your home loan and this interest income will be taxable.
With an offset account you are charged interest on the home loan balance minus the amount in your linked offset bank account. The more money you have in your linked offset bank account, the less interest you pay on your home loan.
Offset Account Strategies
There are a number of ways you can utilise an offset account to further reduce the interest expense on your home loan. Some of these may include:
Your online savings account is offering 4.40% pa interest then:
Offset accounts are not suitable for everyone and they are generally only available for variable interest rate loans. So if you have a split loan (meaning part of your home loan is on a fixed interest rate and part is on a variable interest rate), you will only be able to link the offset account to the variable part. If you have a fixed home loan then you may need to wait until the fixed period of your loan expires as breaking a loan or making changes to an existing loan can sometimes incur significant exit and penalty costs.
If an offset account isn’t the right option for you, then you can make extra repayments to reduce the home loan which will increase your equity in your home and help to reduce your loan repayments. If your loan has a redraw facility, you may be able to access these additional repayments if needed down the track.
If you are interested in an offset account, you should seek professional advice to make sure that it is an appropriate strategy for your situation and to ensure you are fully aware of the implications, fees and costs as well as any risks involved before making a decision.