How to decide if you need an offset account

A mortgage offset account is a savings or transaction account that can be linked to your home loan. The balance in this account ‘offsets’ daily against the balance of your home loan before interest is calculated. In other words, the balance of your home loan is reduced for the purposes of calculating interest. An offset account can help you cut years off your home loan term and save money on interest.

Let’s look at an example. If you have a home loan balance of $250,000 and have $10,000 in your 100% offset account, you’ll only pay interest on a home loan balance of $240,000. Because your home loan interest is calculated daily, every dollar in your offset account can save you money in interest. That means more of your repayment goes towards paying down the principal, helping you to repay your home loan faster.

The benefits of an offset account

• An offset account is easy to manage. Simply have your salary and any other income deposited into your account to have an immediate impact on the amount of interest you pay, as the interest on your home loan is calculated daily.
• An offset account offers convenience and flexibility should you need it, as the account allows transactions and transfers giving you the same accessibility as an everyday transaction account.
• Some lenders offer multiple offset accounts linked to your home loan, so you can manage your finances while still benefiting from the interest saved on your home loan. This can be a great way to save for big expenses such as a holiday or a new car while still saving on home loan interest.
• Offset accounts are usually part of a home loan package that incur an annual fee, lower interest rate and other product discounts could still help you save money.
• An offset account can be more beneficial than a savings account as the interest you may earn on a savings account is less than the interest incurred on a home loan. There will be no tax on the interest you earn and you’ll be building valuable equity on your property.

This may or may not work in your favour. If rates go down in that time, you’ll get a lower rate. But if they go, you’ll be paying more.

If you want certainty over your rate, some lenders will let you ‘lock it in’ using a rate lock, which involves paying a rate lock fee. This fee can be a small amount or it can be significant, and some lenders will waive it all together, so you need to understand the lender’s specific policy before going ahead with a rate lock.

Choosing to lock in your rate allows you to proceed with peace of mind that your interest rate will not move between when the rate lock is effective and the rate that would be applicable on the day of settlement.

Finally, make sure you take note of the rate lock expiry date, as it will usually be in place for 90 days. If your settlement still hasn’t occurred when it expires, it will need to be renewed (including paying another fee) for it to remain in place. This can be an important consideration if you have negotiated a long settlement.