Reduce your home loan interest payments with an offset account. Pay off your principal loan balance sooner. Find out if it’s an option for you. Read on for Monzi’s guide to offset accounts. We’ll cover everything you need to know. Let’s go.
Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.
Offset accounts: what are they?
In short, an offset account is a feature offered on some home loans that reduces the amount of interest that you pay.
The term ‘offset’ comes from the fact that your account balance offsets the amount that you owe. For instance, if you’ve got an outstanding balance of $300,000 on your home loan and $50,000 in an offset account, then you’re only required to pay interest on the difference of $250,000.
If you’re able to commit a significant amount of funds to your offset account then the potential interest savings over the course of your loan may be considerable.
Finally, one additional benefit is that an offset account acts like a normal savings or transaction account. You can deposit, withdraw, make purchases and even earn interest on your account. You’ll even get a linked debit card too.
Balance offset accounts: what are they?
A balance offset account is the most common form that these accounts will take. In short, your interest payment is offset by the amount of money held in the account. Going back to the previous example, if you’ve got $50,000 in an offset account and owe $300,000 then you will only pay interest on the difference of $250,000.
However, one thing to keep in mind is that not all offset accounts are the same. While 100% offset accounts will maximise your interest savings, others may only offset your interest payment by a portion of your balance (e.g. 50%).
Is opening an offset account worth it?
Yes, if used correctly you can potentially save yourself a ton of money on your interest payments. Moreover, the fact that they can be used like a transaction account provides the flexibility to access your money whenever you need it.
However, in saying this, offset accounts do have flaws. Often lenders may charge you a premium for access to additional features such as offset accounts or redraw facilities. Premiums usually take the form of either additional fees or higher interest rates.
What are the benefits of offset accounts?
There are a number of benefits that come with opening an offset account on your first home loan. While we’ve already touched on one of the major ones, there are a handful of additional benefits that warrant consideration too.
As a guide, the main benefits include:
- Reduced interest: with an offset account, every cent matters. While you might feel that a small balance may not be worth it, it will still reduce your interest payment to some degree. However, ensure that this is not exceeded by additional fees.
- Easy to manage: an offset account may be no different to a standard savings account. As a result, there are few complicated rules or restrictions. You can simply use it like any other transaction account.
- Access when you need: with an offset account, you get the best of both worlds. You can save money on your home loan while at the same time, you can still access your money if you find yourself needing cash. In short, an offset account can be a handy source of emergency cash if something goes wrong.
How much can you save with an offset account?
In short, it’s impossible to provide an exact figure. However, it’s not unrealistic to believe that an offset account could save you thousands over the term of your loan.
Ultimately, the exact amount you save will be determined by your principal amount and the balance of your offset account. The more money that you are able to commit to your offset account, the greater your interest savings will be. However, this should never come at the expense of being able to afford your day-to-day lifestyle.
Can I get offset accounts on a fixed and variable home loan?
Potentially, however, you will need to consult with your lender and your contract in order to determine if you are able to open an offset account.
On the one hand, with a variable rate home loan, offset accounts are a common feature. Variable rate loans are known for their flexibility and being able to offset your outstanding balance is one example of this.
On the other hand, in most cases, with a fixed loan you will be unable to reap the benefits of an offset account. This is due to the fact these loans have repayments that are set and will not change. As a result, the funds in your offset account may not matter.
However, once your fixed period ends and the loan reverts to a standard variable structure, you may then see the benefits.
What about a split rate loan?
Split rate home loans combine fixed and variable rates. In other words, you’ll pay a portion of your repayment on a fixed rate, with the remaining proportion paid on a variable rate. The idea is that you receive the benefits of both while minimising the downsides.
Typically, a split rate loan will remain in place for a period of between one and five years before reverting to a standard variable rate.
In most cases, if you have the option to open an offset account on a split loan then it will only offset the interest paid on the variable rate. After all, your repayments are locked in on the fixed rate. As a result, you may not receive the full benefits.
What is a 100% offset account?
With a 100% offset account, your outstanding loan amount is offset by the total balance of your offset account. In other words, it’s the offset account that provides the greatest benefit by maximising your interest savings.
With this, if you’re looking to open an offset account, this should be what you look for. However, not all lenders will offer 100% offset accounts. Some will only allow you to offset your mortgage by a proportion of your balance (e.g. 50%). As a result, opening an offset account may not always be worth it.
Car loans and offset accounts
While offsets accounts are typically linked to home loans, there are now a few new and innovative lenders that are offering these accounts on car loans too.
In short, these accounts are no different to those offered on standard home loans. You are able to transfer any additional savings that you have to your car loan offset account which will then reduce the amount of interest that you must pay. Best of all, you can then access the cash whenever you need it.
However, remember that any money that you withdraw will reduce the amount by which your loan is offset. As a result, your interest payment may increase.
Finally, keep mind that this is a new product and has limited availability. If you are looking to purchase a car, do your research to determine if it is an option for you. Moreover, determine whether they are offered on used car loans too.
Why can’t I get offset accounts on a personal loan?
In any case, if you do have extra cash burning a hole in your pocket then you could consider making an additional repayment or pay off your loan early. However, keep in mind that this may result in your account being charged an early exit fee.
Finally, remember that with all cash loans and home loans, while it would be nice to make additional payments or offset contributions you are not obliged to do so. The only requirement is that you make your contractual repayment on the relevant dates.
Can I withdraw money from my offset account?
In most cases, an offset will act like a transaction or savings account. In other words, you can access the money whenever you need it via withdrawals or a linked debit card. As a result, it can be a handy back-up if you find yourself needing cash fast.
However, one thing to keep in mind is that with an offset account, you may need to maintain a minimum balance. With this, aim to use it only when you need it.
Offset accounts or redraw facilities: which should I choose?
In short, this will depend on your preferences and financial situation.
While we’ve covered offset accounts already, redraw facilities are a little different. With a redraw facility, you have the option to access extra repayments that you’ve made through the course of your loan. In other words, if you make an extra repayment, these funds will be assigned to their own balance. Then, if you find yourself needing cash in the future, you can potentially withdraw a portion of these funds.
One thing to consider is that redraw facilities typically come with less flexibility than offset accounts. Withdrawals are often capped to a fixed percentage and often come with fees too. As a result, you will need to do your research to determine which option is best for you.
Can I get a home loan and offset account with bad credit?
While personal loans for bad credit are becoming more readily available, it’s still extremely difficult to take out a mortgage with bad credit.
Realistically, this makes sense. Mortgage loans can range into the hundreds of thousands of dollars meaning that lenders must be absolutely certain that you will meet your loan obligations. If you’ve got bad credit history then lenders may doubt your ability to do this.
Having said this, it may still be possible to access a home loan as well as additional options such as an offset account with bad credit. However, you will need to be in a secure financial position and find a lender willing to take on bad credit. Moreover, you will need to be approved based on the lender’s thorough evaluation of your finances.
Are offset accounts an option on land loans?
With a land loan, you can access the cash you need to purchase your plot where you will build your new home. In many cases, these loans are coupled with construction loans and come with the condition that you must begin building within a certain time period (e.g. five years).
While exact terms and features will vary between lenders, there may be a few who will offer the option for you to open an offset account. This will work in the same way to any other offset account (i.e. one attached to a mortgage) and will reduce your interest payment.
As a result, before taking out a land loan, consult with your lender to determine if an offset account is an option for you.
Can you have two offset accounts?
Yes, however, allow us to explain.
Some lenders may offer the option to offer multiple offset accounts all linked to your home loan. With this, your total offset amount is pooled and used to reduce the amount of interest that you pay.
The benefit of multiple accounts is that as they are like transaction accounts, you can allocate each account to a specific goal or purpose (e.g. renovations or holidays). As a result, tracking your financial goals is much easier while at the same time, you’re maximising your interest savings too.
However, remember that holding multiple linked accounts won’t produce any additional savings. After all, whether you have $50,000 in one account or $10,000 in five accounts, the net savings will still be the same.
What is the best way to use offset accounts?
When it comes to an offset account, you have the option to use it in a number of different ways. Ultimately, it will be up to you to decide which option that you choose.
Settling aside the interest-saving benefits, possible uses include:
- An emergency cash fund: deposit funds into your offset account and only access it if find yourself short on cash.
- A savings account: use your offset account to keep track of your savings goals. Open multiple linked accounts and assign each to a different goal. Minimise your interest while working towards your goal. It’s a win-win.
- A day-to-day transaction account: if you want to make your offset account your primary transaction account, you can. With a linked debit card, you can use it to make all the purchases that you need. Moreover, it saves you the hassle of having to make regular deposits into your account.
Does an offset account reduce monthly repayments?
With an offset account, your monthly repayments will remain the same. However, the difference is that you’ll be paying less interest. That means that more of your repayment will go towards paying off your principal loan balance.
As a result, it may be possible to pay off your loan sooner. By paying less interest and committing more funds to your principal balance, your outstanding amount will decrease faster than it otherwise would have. You could potentially be debt free months or maybe even years sooner than you thought. Moreover, the amount that you save on interest can stretch well into the thousands.
How is offset interest calculated?
With your home loan, lenders calculate interest based on your outstanding balance. In most cases, this will be a variable rate under 5% annually. Although rates will vary based on a range of factors.
In any cases, when it comes to your offset account, the calculations won’t change. Instead, you will simply need to pay a reduced interest amount given that your outstanding balance will be offset by the amount of cash in your offset account.
How do you maximise offset accounts?
In short, deposit early and often. The sooner that you are able to add funds to your account, the greater the benefits you will see over the course over your loan. Moreover, making regular deposits will only add to your interest savings.
If you want to be really proactive, you can have your paycheck sent straight to your account. From there, you can simply use it as your day-to-day savings account making purchases whenever you need. Alternatively, you could simply funnel any excess funds to it from your existing accounts on a regular basis.
At the end of the day, offset accounts come with a level of flexibility. As a result, it’s up to you to take advantage and maximise the benefits on offer.
Offset accounts calculator
Keen to know how much you will save? A principal and interest loan calculator might be able to help.
In short, all you need to do is enter the details of your home loan (e.g. balance and interest rate) and the balance of your offset account. From there, you’ll receive an outline of exactly how much you will save in an easy-to-understand way. In addition to this, you can easily adjust your balance amount to see how a smaller or larger balance would impact your savings.
Many lenders offer these calculators for free online so why not take advantage? Get an idea of how much you can save today. However, keep in mind that all the figures are estimates. Actual savings may vary.
Is it better to make extra repayments or open an offset account?
In short, it’s up to you. While both present viable strategies that could help you reduce your total loan costs, their suitability may depend on your circumstances.
If you have a large lump sum that can be transferred into an offset account then this may be the better option. After all, it will continue to provide you with benefits in the form of reduced interest payment. In addition to this, you will still have access to the money should you need it.
On the other hand, an extra repayment is likely to be a more achievable strategy for most people. Typically, it will be far smaller than the amount required for an offset account and it will reduce the amount you owe. Obviously though, unlike an offset account, once you’ve paid the money, you won’t be able to get it back.
What are the downsides of an offset account?
While offsets can be a handy financial tool and can save you a ton of money on interest, they are not perfect. In fact, there are two drawbacks that you should consider before diving in.
Firstly, they may come with a high monthly fee. Alternatively, your loan may come with a higher interest rate if you have the option to open an offset account. In short, this way, lenders are able to make up some of the loss they experience from your reduced interest payments. So, before opening an offset account, ensure that any savings will exceed the additional fees.
In addition to this, offset accounts often have a minimum required balance that you must reach to be eligible for the benefits of reduced interest. While often it is a binding requirement set by lenders, at other times it’s on you to determine if the benefits are worth it. If you do not have a large enough balance in your offset accounts, any potential interest savings may be negligible. As a result, your funds may be better used elsewhere.
What features should I look for in an offset account?
Like with most products, offset accounts come in a range of forms with a list of different features. As a result, it’s crucial to select the right one.
However, if you’re not what to consider, that’s okay. Here’s a quick list of key features to look for:
- 100% offset
- No minimum or maximum balance limit
- Minimal fees
- Access to your cash when you need it (e.g. unlimited withdrawals and debit cards)
- Interest-earning options
What other ways are there to save money on my home loans?
We all want to repay our loans ASAP. Luckily, for mortgage holders there are a few things that you can do that might save you money while allowing you to repay your loan early too. While we’ve already discussed offset accounts extensively, other options include:
Make an additional repayment when you can
Obviously, your day-to-day expenses must come first. However, if you’ve got a little bit of extra money saved then making an additional repayment every now and then can help you repay your debt sooner. Moreover, making an extra repayment reduces the principal amount that you owe. Reducing this, will reduce your interest payment.
As a general rule though, only make an additional repayment if you can. There’s no need to over-extend yourself to simply make an extra repayment. If you cannot afford it, just stick to your standard repayment schedule.
Consider fortnightly repayments
A year has 12 months but 26 fortnights. As a result, switching to fortnightly repayments means that you can make the equivalent of one additional monthly repayment per year. However, not all home loans will offer this flexibility. As a result, contact your lender to determine if it is an option for you.
Get a better rate
If you’re unhappy with the rate that you are currently paying then shop around. It’s possible that you may be able to get a better deal through refinancing. Alternatively, contact your lender and try to negotiate a better rate.
Avoid mortgage fees where you can
This is something to consider before you enter into a mortgage agreement. Make sure you shop around and compare lenders based on the interest rate and fees applied. Even a small annual saving can add up into a considerable amount over a 20-30 year mortgage term.
For additional tips on paying off your mortgage early, check out Moneysmart’s handy guide.
Offset accounts and Monzi
Unfortunately, as Monzi is not a mortgage lender, we are unable to help you open an offset account. We’ve simply provided the information required to help you make an informed decision as to whether an offset account is the right choice for you.
In saying this, if you’re looking for a instant loan then we might be able to help. Through our lender-finder service, you can apply and be paired with a great lender in what feels like no time. As a guide, you can potentially borrow cash amounts ranging from $300 to $10,000. See below for details and features:
- $300 to $2,000
- 12 month repayments
- $2,100 to $4,600
- Secured loans
- 13 to 24 month repayments
- $5,000 to $10,000
- Secured loans
- Repaid over 13 to 24 months
What expenses can I cover with a personal loan?
Have an expense that you must cover today?
The good news is that fast loans bad credit can cover almost any cost that you encounter. All you need to do is provide the exact reason when you apply.
To give you an idea, common reasons that Aussies just like you apply with Monzi include:
- Car loans and repair costs
- Rental bond
- Household re-decorating (e.g. new furniture) and maintenance
- Bills: medical, vet or utilities (e.g. water)
- Travel and holiday loans
- Debt consolidation
- New technology or white goods
So, do you have an expense that must be covered now? A quick personal loan could be an option for you. Scroll up and apply with Monzi today. It might be the simple and easy way to access great lenders online.