Alan Hartstein
Athena Cocoves
When taking out your mortgage, you want your money to work hard for you, so one feature it definitely pays to become acquainted with is an offset account.
What is an offset account?
An offset account is a transaction account linked to your home loan which, like the name suggests, can be used to ‘offset’ the amount owing on your mortgage. So, if you have a mortgage of $400,000 and $50,000 in your offset account, you’re only paying interest on $350,000 – the difference between the two.
Offset accounts come in two varieties, partial and full. A full, or 100% offset account, is where every dollar goes toward paying off the interest of your mortgage, while in a partial offset account only a portion of your account balance is offset against the home loan.
While it would clearly be more beneficial to have all of your money going toward reducing your interest, some lenders may charge higher fees or even a higher mortgage interest rate for a full offset account. So you need to fully understand your lender’s terms and conditions before proceeding.
How does an offset account work?
You can access the money in your offset account by using a debit card or from an ATM just like a regular transaction account. Whenever there is money in your offset account it will reduce your interest commitment as in the above example.
Many mortgagees have their pay deposited directly into their offset account and use it just like a regular transaction account. Alternatively, you can use your offset account to save for a holiday, a car upgrade or renovations. Be aware, though, that the less money you have in the account, the more interest you’ll be charged on the principal of your mortgage.
Like a redraw facility, you can also use the money for emergencies, such as medical procedures and bills, and like a regular transaction account, the funds should always be available immediately.
Offset versus a normal savings account
An offset account will benefit you more as a mortgage holder than your normal garden-variety savings account simply because the interest you save on your mortgage will be much greater than the interest you’ll get in a savings account.
Additionally, an offset account should come with all the features of an everyday savings account. So there is nothing to be gained from keeping extra cash in a savings account when you have offset and redraw facilities at your disposal.
In addition, the interest you earn in a savings account is considered income and is therefore taxable, whereas the money you save from your home loan interest in an offset account isn’t.
Different lenders have different fees and charges so it’s always worth talking to a financial planner or mortgage broker about your options. It’s unlikely, however, that you will be ahead if you opt to put extra money into even a generous bank savings account.
Offset vs redraw – what’s best for you?
Offset accounts and redraw facilities can both help you lessen the term and amount of your mortgage considerably. They are both available on standard variable loans and some fixed-loan mortgages and are designed to help pay off your home loan sooner.
There are also a number of important differences between the two, which you need to be aware of, such as:
- An account versus a facility
- Fees
- Amounts
- Flexibility
An account versus a facility
An offset account is like a normal, everyday transactional bank account except the funds in it are subtracted from the amount of interest you pay on your mortgage. Like any transactional bank account, you can buy things, transfer money in and out and to and from other accounts, or have your salary and other income deposited into it. A redraw facility, on the other hand, is simply a feature linked to your mortgage that you can use to make extra repayments.
Fees
Offset accounts generally will attract fees like most other bank accounts do, usually in the form of periodical administrative charges. A redraw facility, on the other hand, should not attract any bank fees. Having said that, you should always check with your lender about the fees that both facilities attract and how much they may affect your total mortgage bill over time. At the very least, you should ensure that the money you save on interest with an offset account outweighs any associated fees your lender throws at you.
Amounts
Any money in an offset account is there for you to do with as you please, whereas your lender may place limits on the minimum and maximum amounts of money you can withdraw from your redraw facility.
Flexibility
Offset accounts generally are more flexible as you can access the money immediately like a bank account whereas a redraw may take up to several business days depending on your lender. For those who are more disciplined with money, this is a good thing as they’re less likely to spend money in their account frivolously. Anyone who is more of a spendthrift is better off with a redraw facility where it is harder to get your hands on the money immediately and may serve to temper impulse buying. Everyone has different spending and savings habits and what’s right for you will depend on your level of discipline and responsibility with money.
The best of both worlds
An offset account and a redraw facility are by no means mutually exclusive. Many homeowners find themselves successfully using a hybrid of the two to maximise their home loan investment, so your decision doesn’t have to be either one or the other.
You may find, for example, that you can make an extra $200 a month payment into a redraw facility but also use an offset account as your everyday bank account where your salary is deposited. In such a scenario, both accounts are working for you to achieve the ultimate goal of paying off your mortgage.
Remember, both offsets and redraws are there to help you pay off your mortgage as soon as possible. It’s always a good idea to talk to your lender or a financial adviser about the best course of action.
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