Faced with high interest rates and a cost of living crunch, home owners in droves are using home loan offset accounts to their advantage.
One of the nation’s biggest banks, NAB, reports that almost 70% of new home loan customers are opting for an offset account, up from 50% just two years ago. And it can help them save on interest.
How do offset accounts work?
An offset account is typically an everyday account (or multiple accounts) linked to your home loan.
You won’t earn interest on the money stored in the offset account/s. Instead, the balance is deducted from, or ‘offset’ against, the balance of your home loan when loan interest is calculated.
Say for instance you have a home loan of $400,000 and $20,000 in the linked offset account. You’ll only pay interest on $380,000 ($400,000 less $20,000).
This can reduce your monthly interest costs. And as your monthly repayment amount stays the same, more of each regular repayment goes towards paying off the loan balance. That is: more of your repayment amount goes to paying down the principal component of your principal + interest loan.
This in turn further reduces next month’s interest cost, too.
In fact, Macquarie Bank calculates that based on the above scenario with $20,000 in your offset account over the life of a 30-year loan (with an interest rate of 6%), you can save more than $87,000 in interest, and shave more than three years off your loan.
Even better, money in the offset is usually available to withdraw if needed – so the cash can be made available for unexpected bills.
How to use an offset account to your advantage
The bigger the balance of your offset account, the more you’ll likely save on loan interest.
According to NAB, one way to grow the value of your offset account is with a ‘three Cs’ strategy: crediting, consolidating and cutting back where you can.
Asking your employer to ‘credit’ your salary directly into the offset account could help maintain a higher balance.
If you have cash stored in a savings account, you could consider ‘consolidating’ it into your offset account. You may be able to earn interest of up to 5% on a savings account but if your mortgage rate begins with 6%, chances are you’ll save more with an offset account than you’ll earn on a savings account. Plus, interest savings in an offset aren’t taxed.
Meanwhile, ‘cutting’ back household spending where possible can help you boost the balance of your offset account to improve interest savings.
It’s an approach being used to great effect by plenty of home owners. NAB reports a 55% increase in the value of its offset accounts since the pandemic – rising from $29 billion in 2020 to more than $45 billion today.
Is a home loan offset account right for you?
Despite the popularity of offsets, they may not be a suitable choice for everyone.
An offset home loan can sometimes come with a higher rate than a more basic loan, and unless you consistently have a reasonable balance in the linked offset account, you could end up paying more than you save in interest.
Also, the money you store in an offset account could be used elsewhere as an investment – so it’s worth weighing up whether to prioritise reducing your home loan now or investing for the future.
If you’re not sure where to begin, contact us today to find out if a home loan offset could help you get ahead with your mortgage and save on interest.
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