What is an Offset Account?

A house loan is directly connected to an offset account. It functions similarly and has the same functionality as a regular transaction account. Money can be taken out or deposited at any moment. You can have your salary deposited directly into your offset account. Additionally, you can open a debit card and use this account to withdraw money from ATMs.

The key distinction is that your offset account balance is used to offset the balance of your outstanding mortgage debt when your bank determines interest rates. This implies that your bank will only assess interest on the balance of your mortgage, less the amount of your offset.

An offset account may enable you to save a sizable amount of money throughout your loan. But before you put one up, there are a few things to consider.

Different types of offset accounts

The two main categories of an Offset account are:

●     100% Offset Account

Every dollar in your offset account is used to reduce the balance on your home loan account to 100% or "full" offset accounts. These are frequently offered for home loans with variable rates. The 'interest' you accumulate on the offset account lowers the interest you must pay on your loan each month. You will be paying back the loan principle more frequently.

●     Partial Offset Account

The "interest" you accumulate in the offset account is calculated at a rate lower than your loan's interest rate. For instance, if your loan rate is 3% and the offset rate is 1%, you are still saving money, but not to the same extent as with a 100% offset.

Only a portion of the sum is applied to your loan under a different kind of partial offset account, which is less typical. For some fixed-rate loans, these kinds of accounts might be offered. For instance, if you had a savings account with $20,000 and a 40% partial offset account, you would pay interest on $192,000 and offset $8,000 from your loan debt (40% x $20,000).

Offset Account vs Normal Savings Account

Compared to a standard savings account, your money typically works harder in an offset account. This is because a home loan's interest rate is generally higher than the interest on a savings account.

Another benefit of having an offset account is that the interest you save won't be taxed because it won't be considered income. However, the interest you get on a savings account is typically regarded as income and may therefore be subject to taxation.

Different charges could be applicable for offset accounts and savings accounts.

How Does an Offset Account Work?

There are two components to your home loan offset account.

●     The Principal Amount:

The total borrowed amount

●     Interest Charges:

The monthly charge on your home loan balance is for the daily interest you pay on the principal.

The money you keep in an offset account balances against the total amount you still owe on your loan, which includes the principal balance and any accrued interest. This implies that the more you retain in your offset, the less interest you pay.

Any savings should be kept in an offset account because of this. It may enable you to pay your mortgage more quickly and save you thousands of dollars over time.

What’s the Difference Between Offset and Redraw?

An offset account is distinct from a redraw facility. A home loan feature known as a redraw facility may be applied to certain house loan accounts. There is a difference in how you deposit and access the extra funds, even though both allow you to make additional repayments and access this money later if you need to.

You must put the funds into a transaction account before withdrawing money from a redraw facility. You have direct access to the money if you have an offset account.

Which is best for you will depend on your unique situation and any additional interest or fees you would have to pay to use it. Both can speed up the home loan repayment process.

Some lenders, such as Westpac, provide house loans with redraw capabilities and offset accounts so borrowers can take advantage of both worlds.

You may get your salary and make payments from your offset account just like a regular transaction account. Regular deposits and periodic withdrawals, such as paying for renovations, can be made via a redraw service.

The Pros and Cons of an Offset Account

Consider the following when determining whether an offset account is appropriate for you:

Pros

1.   Reduction in Interest Rates

The main advantage of an offset account is the opportunity to lower the interest you pay on your mortgage.

2. Tax Saving

There might be tax advantages. Any interest you save by keeping money in your offset account is not taxable because it isn't considered income. However, interest income from savings accounts is typically taxed.

Accessible Money

Your money is not locked up, even though your offset account is assisting you in lowering home loan interest payments. You can use it as a regular account and access your money whenever possible. Therefore, you can use your offset account whenever you need more money for a home improvement project, a last-minute trip, or even just to cover your food costs. But keep in mind that when the balance in your offset account declines, so will the interest savings.

4.   Over the Time Savings

It's also important to know that mortgage offset accounts do not pay interest like savings. However, the amount of money you'll save on interest payments throughout your mortgage loan may exceed the return on a savings account.

Cons

1.   Charges/Fees

For a loan with an offset account, it's feasible that you pay a larger establishment or monthly maintenance charge. There may be a monthly account charge for the offset account itself. It's important to note that if you choose the Premier Advantage Package with your home loan at Westpac (a $395 Annual Package cost applies)#, these fees are eliminated. Additionally, a house loan with offset may have a higher interest rate than one without offset.

2.   Availability

Offset accounts are typically connected to house loans with variable rates.