100% Offset accounts
Having your everyday banking account linked to your home loan for 100% offset is an easy way to reduce the interest you pay without making extra payments on your loan.
Offset is a feature that you can be added to your variable rate home loan. It links an everyday banking or savings account to your loan, and uses your account balance (the money that you have in the bank) to offset your loan balance (the amount that you owe).The more money you have in your linked everyday banking account, the less interest you pay on your home loan.
How offset works
When you borrow to purchase a home, the bank will charge you interest on the amount that you borrow. And when your bank works out the interest amount, you’re usually charged interest on your whole loan balance (ie. the total amount you owe on your home loan).
Having offset changes this. Instead of being charged interest on your full home loan balance, you’re charged interest on your home loan balance minus the amount in your linked everyday account.
For example, $10,000 sitting in your everyday banking account for the life of your loan could save you $46,319 and help you to pay off your loan much sooner. (These savings are calculated on an interest rate of 7.22% per year and a 25 year loan term.)
Save interest every day
Home loan interest is usually calculated every day, based on the balance of your loan each day. At the end of each month your lender will total up the interest from each day in that month (and charge it all at once). That means that every dollar you have in your everyday banking account saves you interest every day that it’s there. And, whenever you need to access your money it is always available to you in the usual ways, like through an ATM or online.
You don’t need to have a lot of money in the bank for an offset account to save you interest. Over the life of your loan, even a small amount in an offset account can save you thousands of dollars.
For example, if you take a $400,000 loan with a 30 year term and interest of 7.22% per year you’ll see that always having just $500 in your offset account could save you $3,824.
The trade off: Offset accounts don’t earn any interest
Maybe you’re used to keeping your extra money in a high interest savings account. Keep in mind that setting up an offset account means you won’t earn interest on your savings like you normally would. This is a trade-off usually worth making though, as explained below.
Offset vs savings accounts
So long as your home loan interest rate is higher than your savings account interest rate, you’re generally better off using offset, and not earning the interest.
That’s because you’re saving more money by paying less interest on your home loan, compared to the interest you’d be earning on your high interest savings account.
Don’t forget that you’d probably have to pay tax on any interest that you earned in a savings account too. But because an offset account doesn’t earn any interest, you won’t pay this tax by using an offset account (you should check this with your own tax advisor).
Check the costs
You’ll probably find that home loans offering offset don’t charge any extra to set this feature up. It’s a good idea to check, though, and consider any fees when making your decision. Also check what fees you’ll have to pay for the account you plan to use as your offset account.
If you bundle your home loan into a banking package, you may be able to include offset to avoid paying any account fees (some banks will charge these). That’s because banking packages often include discounts and savings on banking products, like account fee waivers.
Source: NAB Learn (www.learn.nab.com.au)
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.