There are many things to consider when choosing the right home loan for you, one of which includes whether to get a mortgage offset account. Often, mortgage offset accounts can be a handy way to save you plenty of dollars and help pay off your loan faster. But, how do they work and is it worth getting one?
We’ve put together a handy guide to help you understand the basics and whether or not you should get one.
What is a mortgage offset account?
A mortgage offset account is a transaction or savings account linked to your home loan. The balance in your account is ‘offset’ against the balance in your mortgage and, as a result, reduces the amount of interest charged. This is because your lender will only charge you interest on the difference, rather than the actual balance of your loan. Essentially, the more money you put in your offset account, the less interest you’ll have to pay on your home loan.
How does a mortgage offset account work?
With a mortgage offset account, you ‘offset’ the full or partial amount of your account balance. To help you understand how it works, we’ve put together an example below:
Types of mortgage offset accounts
There are two types of mortgage offset accounts — a 100% offset account and a partial offset account. Here’s what each type of account means:
- 100% offset account: A 100% or full offset account is where the total amount of the balance in your account is ‘offset’ against your home loan.
- Partial offset account: A partial offset account is where only a portion of the balance in your account is ‘offset’ against your mortgage.
Pros and cons of mortgage offset accounts
While a mortgage offset account has some benefits, it might not be for everyone. To help you decide whether an offset account is right for you, we’ve put together a list of pros and cons:
|Pay less interest||If you opt for a mortgage offset account, you could pay less interest on your home loan.|
|Pay off your loan faster||As you are paying less interest, a mortgage offset account can help pay off your loan faster.|
|Flexible||As an offset account is essentially a typical everyday transactional account, it’s easy to deposit and take out your funds compared to a redraw facility.|
|Potential tax benefits||Often, the interest you earn on a savings account could be considered income and, as a result, get taxed. However, the interest you save in an offset account won’t be considered income and get taxed.|
There are also some drawbacks with getting a mortgage offset account included in your home loan:
|Higher fees||You may have to pay higher fees for an offset account in your loan. It’s always a good idea to check with your lender what fees are included and whether it outweighs the potential savings.|
|Higher interest rates||Often, the interest rate for a home loan with a mortgage offset account is higher. As noted above, check with your lender before choosing a home loan.|
|Minimum balance required||Generally, you’ll need to make a large deposit to actually reap the benefits of a mortgage offset account. If you don’t have enough funds, it might be best to not get one.|
What is the difference between an offset account and redraw facility?
While a mortgage offset account and redraw facility work in a similar way, there are key differences between the two.
A redraw facility is a home loan feature that allows you to make additional repayments on your mortgage. While a redraw facility also helps reduce the cost of interest, it often comes with some limitations. These might include a limitation to the withdrawal amount and number of redraws allowed. With a redraw facility, you’ll also need to make an application to withdraw money so it isn’t as flexible as a mortgage offset account.
Ready to move in?
We hope this article gave you all the tools and information you need to help you choose the right home loan for you. If you would like more information on home loans or home insurance, make sure to check out our other articles on Oiyo!
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Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.