How good is an offset account?
In simple terms, an offset account is a bank account that is attached to a home loan. However, instead of earning interest on your funds which may then be subject to tax, the funds are taken into account when calculating the interest that is due on the home loan. For example, if you have a $240,000 mortgage and have funds in your offset account of $12,000, then interest will only be calculated on the balance of $228,000.
There are two different types of offset accounts – the 100% offset account and the partial offset account – but the more popular one these days is the 100% account. The main difference between the two is that the money that you have in a 100% offset account “earns” interest at the same rate as the home loan whereas with a partial offset account, the interest being earned on the offset funds is less than the interest rate on your home loan.
The big advantage of an Offset Account is that the interest that is earned on a 100% offset account is generally higher than you would normally get in any form of savings account and also that the money in the offset account will either reduce the amount of interest being charged each month (in the case of an Interest Only loan) or will reduce the term of the loan (where the loan is operating on a Principal and Interest basis).
There are some disadvantages however with an offset account in that you may pay a slightly higher interest rate or a monthly fee to have the offset account. Some lenders will also require you to keep a minimum balance in the offset account to gain a benefit.
An Offset Account is ideal for someone who keeps a large amount of savings over any period of time.
They are usually only available on loans with variable rates although there are a very small number of lends that will offer it with fixed rate loans.