When it comes to home loan features, borrowers are truly spoiled for choice. Even basic loan options come packed with numerous features. However, one particular feature has caught the attention of seven out of ten home buyers.
As rising interest rates and a challenging cost of living weigh heavily on homeowners, many are turning to home loan offset accounts to make the most of their financial situation.
According to NAB, one of the largest banks in the country, nearly 70% of new home loan customers are selecting an offset account, a significant increase from 50% just two years ago. This feature can provide substantial savings on interest.
How Do Offset Accounts Work?
An offset account is usually a transactional account—or multiple accounts—that are linked to your home loan.
While you won’t earn interest on the funds held in the offset account(s), the balance is subtracted or “offset” from your home loan balance when interest is calculated.
For example, if you have a home loan of $400,000 and $20,000 in your linked offset account, you will only pay interest on $380,000 ($400,000 minus $20,000).
This arrangement can lower your monthly interest costs. Since your monthly repayments remain constant, a larger portion of each payment goes toward reducing the principal of your loan. This dynamic leads to even further reductions in the interest you owe in the following month.
In fact, Macquarie Bank estimates that if you maintain a $20,000 balance in your offset account over the life of a 30-year loan at a 6% interest rate, you could save over $87,000 in interest and cut more than three years off your repayment term.
Additionally, the funds in your offset account are generally accessible, allowing you to withdraw cash for unexpected expenses.
Maximizing Your Offset Account
The greater the balance in your offset account, the more you can save on loan interest.
According to NAB, you can enhance your offset balance using the “three Cs” strategy: crediting, consolidating, and cutting back.
- Crediting: Have your employer directly deposit your salary into the offset account to help keep a higher balance.
- Consolidating: If you have cash in a traditional savings account, consider moving it into your offset account. While savings accounts may offer interest rates of up to 5%, if your mortgage rate is at 6%, you’re likely to save more on your loan interest through the offset than you would earn in interest on a savings account. Plus, the interest saved in the offset is tax-free.
- Cutting Back: Reducing household expenses can also boost the balance in your offset account, leading to improved interest savings.
This approach has been effective for many homeowners. NAB reported a 55% increase in the value of its offset accounts since the pandemic, growing from $29 billion in 2020 to over $45 billion today.
Is an Offset Account Right for You?
Despite the popularity of offset accounts, they aren’t suitable for everyone.
An offset home loan could sometimes carry a higher interest rate than more basic loan options. If you don’t maintain a reasonable balance in the linked offset account, you may end up paying more than you save in interest.
Additionally, funds in the offset account might be invested elsewhere, so consider whether it’s more beneficial to focus on reducing your home loan now or investing for future gains.
If you’re unsure where to start, contact me today to discover if a home loan offset account could help you save on interest and get ahead with your mortgage.
0447 654 321
