How much can an offset account save you?

Including offset accounts in your home loan strategy could end up saving you thousands of dollars.

Here’s a look at how they work and whether you should consider going this route.

What are offset accounts?
Offset accounts aim to reduce the interest you pay on your home loan. They’re similar to savings accounts, except you deduct money from the loan’s principal to offset your balance (hence the name). You then only pay interest on the amount left in your principal, minus the deduction that was put into your offset account.

You can choose an offset account that’s either 100 per cent or partial. The first option is when the entire amount you’ve offset is taken out before interest is charged for the month. The second is when you have a reduced interest rate apply to an amount equal to the account’s balance. The full 100 per cent offset account is the most popular option, since it’s more effective in lowering interest, Realestate.com.au says.

So how much can a 100 per cent offset account save you? Let’s look at an example.

If your loan is $500,000 and you keep a $20,000 balance in your offset account throughout the loan term, you can save over $10,000 by paying interest on $480,000 instead of the full loan amount. This example uses an interest rate of 5.08 per cent.

Another pro, according to Launch Finance, is that the balance in your offset account isn’t taxable, since it doesn’t generate interest.

Are there downsides?
You may be thinking – of course I want to save money, so why wouldn’t I do it?

First understand that the costs of offset accounts can vary, as different lenders offer different fees for them. Also, if your home loan comes with an offset account, you could end up seeing higher interest rates or fees.

Realestate.com.au also advises that if you’re looking to reduce your loan payments, an offset account may not be the best option. And another thing to be aware of is that you only see big benefits when you can make big deposits into the offset account.

If you have further questions about offset accounts and whether they’re right for you, our team can help. Speak to a member of our team today to learn about your home loan options.