Home Loan Offset Calculator
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What is a Home Loan Offset?
The Home Loan Offset is a loan-linked account where transactions pertaining to home loans are facilitated. The recipient of the loan is required to make deposits in this account to offset the principal amount on their home loan. The Offset Account allows the loan recipient to save on interest payments as the deposits in the offset account are subtracted from their home loan balance.
Let’s take an example for a better understanding.
Suppose you have been granted a home loan of $150,000 from the bank. The balance in your offset account is $30,000. The interest accrued for the borrower would be on the balance amount, that is, $120,000 ($150,000 - $30,000).
The characteristic that makes the offset account a popular choice among loan recipients is that it is like any other everyday account. The account holder can access the fund to conclude transactions unrelated to the home loans while simultaneously subsiding the interest payments.
What is a Home Loan Offset Calculator?
The Home Loan offset calculator allows users to compute the amount they can save on their home loan by maintaining an account balance on their offset account. Users of an offset loan calculator can mention and compare the varying deposit amounts to compute the impact of offset balances on the interest and tenure. One can employ an offset loan calculator to review the total interest saved and revised loan term after accurately mentioning the values on the calculator fields.
How does UM Oceania's Home Loan Offset calculator work?
The UM Oceania’s Home Loan Offset calculator is an AI-powered self-help tool that allows the user to compute:
- Total interest saved in the repayment.
- Revised loan term
The straightforward interface of the calculator enables first-time users to conclude the calculation without any hassle. The user must mention the values in fields featured on the calculator and obtain the result instantaneously.
How Does an Offset Account Work?
The home loan balance constitutes the following components:
Principal: Refers to the loan amount borrowed from the lender.
Interest: The fees the borrower pays on the loan. The interest rate on the loan is accounted for daily on the borrowed amount and summed up for the monthly payments.
The amount deposited in the offset account is kept against the loan amount, the sum of principal and interest. The more you deposit in your offset account, the less interest the borrower would have to pay on their loan. The borrower should allocate sizable savings in an offset account to limit the interest payments on their loan.
Benefits of Home Loan Offset Calculator
The offset calculator provides the following benefits to its user:
- The borrower can compute the impact of the interest amount on the loan against the balance maintained, as the offset balance is subtracted from the principal amount while calculating the interest.
- The amount saved on the interest payments is not considered income by authorities. Hence, they are not eligible for taxes.
- The balance in the offset account is not locked-up. An offset account operates like any other account and the account holder can perform transactions unrelated to home loans. However, it is to be noted that as the account balance reduces, so do the savings on the interest payments.
- The Loan Offset calculator features a straightforward interface where even-first time users can conclude the transaction. The borrower is required to mention and compare the amount in the required fields to determine the interest amount they stand to save.
How Do I Get the Most From My Home Loan Offset Account?
The loan recipient can employ the following methods to make the most out of their Offset Account:
- The borrower can allocate a major portion of their savings to their offset account to stimulate substantial returns in the form of diminished interest payments.
- One can also link the loan offset account to deposit their salary to ensure a considerable balance in their account and limit the interest payments on their home loans.
Factors to Consider while Using Home Loan Offset Calculator
Before employing the Home Loan Offset Calculator, a user must know of the fields featured on the calculator. The user is required to input the following values on the calculator to derive the amount they can save on their interest payments.
- Loan Amount: Refers to the fund amount borrowed from the lending institution.
- Interest Rate: Rate of interest at which the home loan is granted.
- Offset Balance: Minimum balance the borrower is required to maintain the offset account.
- Offset Account Deposits: Amount deposits in the account to subside the interest payment on the home loan.
How is the Home Loan Offset Calculated?
The offset loan calculator derives the interest by subtracting the loan amount without an offset account with the loan-linked offset account, i.e.
Interest Savings = Interest Paid on Without Offset Account - Interest Paid with an Offset Account
- It is to be noted that the calculator does not provide any provision to account for mortgage repayments.
- The repayments on loans can be weekly, monthly, and fortnightly. Weekly and fortnightly repayments are available only with principal and interest. That is calculated by multiplying the monthly repayments by twelve to derive the yearly interest and dividing the amount by twenty-six or fifty-six to calculate the fortnightly or weekly payment, respectively.
Pros and Cons of Offset Accounts
Maintaining an Offset Account against a home loan entails the following pros and cons for the borrowers:
Pros of the Offset Account
- The Offset Loan reduces the loan balance on which interest is charged, ultimately reducing the repayment's tenure.
- The higher the loan balance in the offset account, the more one can save from the interest.
Cons of an Offset Account
- The account holder is required to bear the maintenance fees to operate an offset account against the loan. One should be aware of these operational costs before establishing an offset account.
- Higher interest rates are charged on home loans granted with a presence of an offset account. The borrower must evaluate whether availing this facility aligns with their budgetary goals.
- The borrower must park a substantial amount in the offset account to ensure the benefits are worth the additional costs utilised to operate the account.
- Even though the account holder can withdraw an amount from their offset account at their discretion, consistently taking out money from the loan-linked account might defeat the purpose of maintaining an offset account as it would positively impact the interest payments.
When Should I Use an Offset Calculator?
The borrower can employ an offset calculator for the following reasons:
- To compute the interest saved by establishing and maintaining an offset account balance.
- To calculate the reduced or revised tenure.
- To compare multiple values of an offset balance in order to determine the maximum benefits which can be availed.
- To derive the monthly deposit amount in the offset account that would diminish the interest payments so that one can align it with their budget beforehand.
Frequently Asked Questions
What is an offset account?
A borrower establishes an offset account against a home loan to reduce the interest payments on the loan by reducing the principal amount against the offset balance.
What is a 100% offset account?
A 100% offset account is linked to the home loan, where the borrower can make deposits to stimulate the balance in the offset account.
Can you have an offset account with a fixed loan?
No, lending institutions do not allow borrowers to establish offset accounts with fixed home loans.
How much money can you save with an offset account?
An offset account allows the borrower to reduce their interest payment by reducing the principal amount against the offset balance. The substantial balance amount can impact the interest payments considerably.
How long does paying off your mortgage with an offset account take?
An offset account can reduce the repayment tenure on a home loan by reducing the principal against the offset balance.