What’s the advantage of setting up a home loan with a linked 100% offset account?
When taking out a home loan, you’re likely looking for ways to save on interest and pay off your loan faster. One of the most effective tools to help you achieve this is a 100% offset account. If you're unfamiliar with how it works or wondering if it's the right option for you, this article will explain the advantages of setting up a home loan with a linked 100% offset account and how it can help you save money in the long run.
What Is a 100% Offset Account?
A 100% offset account is a transaction account linked to your home loan. The balance in this account is "offset" against your home loan balance, reducing the amount of interest you pay.
Here’s how it works: Instead of earning interest on the money in your offset account (like a regular savings account), the funds in your offset account reduce the interest calculated on your home loan. So, the more money you have in your offset account, the less interest you’ll be charged on your loan.
For example, if you have a home loan of $400,000 and $50,000 in your offset account, you’ll only be charged interest on $350,000 ($400,000 - $50,000), not the full loan balance.
Key Advantages of a 100% Offset Account
A 100% offset account can offer several benefits, especially for those who want to minimize interest payments and pay off their home loan faster. Below are the main advantages of using a linked offset account:
1. Reduce Your Interest Payments
The primary benefit of an offset account is its ability to reduce the amount of interest you pay on your home loan. Every dollar in your offset account effectively reduces your home loan balance for the purpose of interest calculation, which means you’ll be charged less interest over time.
For example, if you have a loan of $500,000 at an interest rate of 4% and keep $50,000 in your offset account, you’ll only be charged interest on $450,000. This could save you thousands of dollars in interest over the life of your loan.
2. Pay Off Your Loan Faster
By reducing the amount of interest you’re charged, an offset account allows you to pay down your principal (the original loan amount) faster. Because you’re paying less interest, more of your monthly mortgage repayments go directly toward paying off your loan balance. This means you could pay off your loan earlier than expected without increasing your regular repayments.
For example, if you consistently maintain a balance of $50,000 in your offset account, you could reduce the length of a 30-year loan by several years, depending on your financial situation and loan terms.
3. Access to Your Funds at Any Time
One of the best features of an offset account is that, unlike making extra repayments directly into your home loan, you still have easy access to your money. The funds in your offset account work to reduce your interest, but they remain liquid. You can deposit and withdraw money as needed, just like a regular transaction account.
This flexibility is particularly useful for managing day-to-day expenses or maintaining an emergency fund, all while maximizing interest savings.
4. Tax-Free Savings on Interest
In a regular savings account, you’d earn interest on your balance, which would be considered taxable income. With an offset account, instead of earning taxable interest, you’re saving on your home loan interest, which is tax-free.
For example, if you had $50,000 in a regular savings account earning 2% interest, you’d earn $1,000 in interest, which would be taxed at your marginal tax rate. In contrast, keeping that $50,000 in an offset account saves you from paying interest on your home loan, which is a much more tax-efficient way to use your money.
5. Combine With Other Home Loan Features
An offset account works well in conjunction with other home loan features, such as a variable interest rate or a redraw facility. Many borrowers with offset accounts choose variable-rate loans, which allow them to make extra repayments without penalties. By keeping their funds in the offset account, they save on interest while still having the flexibility to access their money whenever needed.
Who Can Benefit Most From an Offset Account?
A 100% offset account can be particularly beneficial for:
Homeowners with significant savings: If you have a substantial amount of money sitting in savings, you can use it to reduce the interest on your home loan rather than earning taxable interest.
People with fluctuating cash flow: If your income varies throughout the year, or you regularly receive bonuses, commissions, or lump sums of cash, an offset account provides a flexible way to store that money while reducing your loan interest.
Investors: Property investors often use offset accounts to reduce the interest on their home loan while keeping their savings liquid, as withdrawing extra repayments directly from a loan can complicate tax claims on investment properties.
Considerations Before Setting Up an Offset Account
While a 100% offset account can be a valuable tool, there are a few things to keep in mind:
Higher Interest Rates or Fees: Some home loans with offset accounts may have slightly higher interest rates or fees compared to standard loans without an offset option. Be sure to weigh the potential savings from the offset account against any additional costs.
Minimum Balance Requirements: Some lenders may require a minimum balance in the offset account to unlock the full benefits, so it’s important to check the terms and conditions of your loan.
Offset Ratio: Some accounts may only offer a partial offset (e.g., 50% offset), meaning that only part of the balance reduces your loan interest. Make sure your account offers a full 100% offset if you want the maximum savings.
Conclusion
Setting up a home loan with a linked 100% offset account can significantly reduce the amount of interest you pay and help you pay off your mortgage faster. It provides a flexible, tax-efficient way to use your savings while still giving you access to your funds whenever you need them. If you’re looking to save money on your home loan and want to maintain financial flexibility, an offset account could be the ideal solution.
At Rosh Partners, we can help you navigate your home loan options and find the best features, such as offset accounts, to suit your financial goals. Let us guide you through the process of setting up a home loan that works for you.
