Find out more about what offset accounts are, the benefits and how to choose.
One advantage of a variable rate home loan is that, if you have any cash savings set aside, you might be able to utilise an offset account to save on interest.
An offset account is a transaction account that is linked to your mortgage. The money sitting in your offset transaction account reduces the amount of your home loan balance that you are charged interest on. A lump of money sitting in an offset account for a while can end up saving you a respectable amount in interest over the life of your loan.
For those that have spare cash, an offset account can be a useful place to park it. The interest you save in interest on your loan is interest that your money is effectively “earning” – but because it’s not income, it’s tax free.
Offset accounts are a popular choice
Roughly 30,000 people compare home loans on the CANSTAR website every month, giving us a wide range of insights into what Australian homebuyers are looking for in a mortgage.
One thing we can say for certain is that an offset account feature is the number one thing Aussie homebuyers are looking for. 23% of visitors searched for an offset feature when comparing home loans with our comparison tables.
A redraw facility was also popular, with 15% of visitors searching for this feature.
Of the variable rate home loan products that CANSTAR rated in 2016, 438 out of 794 have the option of including a 100% offset account.
How much could an offset account save you?
As an example, CANSTAR has calculated the benefit of holding either $20,000 or $40,000 in a mortgage offset account for 3 years, against a $300,000 home loan, as follows:
|Table: Interest paid on a $300,000 loan over 3 years|
|Product||Interest Rate||Monthly Repayment||Amount owing after 3 years||Interest paid over 3 years||Amount repaid after 3 years|
|Variable with $20,000 in offset||4.77%||$1,568.56||$282,405.86||$38,874.04||$17,594.14|
|Variable with $40,000 in offset||4.77%||$1,568.56||$279,335.50||$35,803.68||$20,664.50|
As you can see, the more you have in an offset account, the less you pay in interest. So how much of a savvy saver could you be with an offset account?