The new year is upon us and with it comes opportunities to take control of your home loan by proactively looking for ways to save. 

If available and used correctly, an offset account is an excellent tool to lower the amount of interest you pay on your mortgage and help you pay off your loan faster.

Not all home loans have the added feature of an offset account, and it may lead you to paying a slightly higher interest rate or have fees attached. So here is what you need to know about offset accounts in 2022.

What is an offset account?

An offset account is a savings account linked to your home loan. This means that every time you make a deposit into your savings, it reduces the outstanding balance on your home loan, helping you make large savings on your interest repayments.

Offset accounts work by reducing the amount of interest you pay on your home loan. This is done by reducing the outstanding balance on your home loan each time you make a deposit into your savings account. 

For example, if you have a home loan of $300,000 and an offset account with a balance of $30,000, your home loan will only be treated as if you owe $270,000. This can save you thousands of dollars in interest over the life of your home loan. Generally, you can also access the $30,000 in savings like any other everyday account.

What are the benefits of an offset account?

Offset accounts can be used as a home loan repayment strategy as well as for savings. The real benefit is the ability to reduce your home loan interest and make additional deposits into your offset account without having it count against you, which means you’ll save more money over time. 

Additionally, the savings account you make deposits into works like common everyday bank accounts for you to access easily. 

What’s even better is that most home loans with an offset facility don’t charge fees for having an offset account, but always keep an eye out for any fees associated with your offset account.

No home loan is the same, which means you need to make sure your mortgage has all of the features you want and need to suit your lifestyle today, as well as tomorrow.

How does an offset account differ from redraw facilities?

Offset accounts and redraw facilities are two of the most common features on home loans in Australia. An offset account differs from a redraw facility in that it allows you to reduce the outstanding balance on your home loan each time you make a deposit into your savings account. A redraw facility, on the other hand, allows you to withdraw money that has been previously deposited and these deposits pay off your principal repayment.

A redraw can be more difficult to access than a normal everyday bank account, but may suit your circumstances better, particularly if you struggle to leave your offset funds alone. 

With a redraw facility, the bank is allowing you to access additional payments you made towards your home loan. Let’s look at an example:

• Say your minimum monthly repayments are $1000.
• You opt to make additional repayments of $200 each month. This accumulates to $2400 over 12 months.
• You may then access this $2400 at the end of the year with an eligible redraw facility.

Remember, a redraw facility does not function like your traditional savings account. It does not provide the same flexibility you find in an offset account, but this can work in your favour if you’re easily tempted to spend your savings.

To maximise the benefit of an offset account, ensure that you are making regular deposits into your savings account. This will help to reduce the outstanding balance on your home loan and save you on interest repayments. If your spending habits increase in the new year and you continually withdraw funds from your offset account, you will decrease the amount saved.

You can learn how to maximise the benefits of your offset account at Yellow Brick Road here.

If you want to learn more about offset accounts, speak to one of our home loan experts or apply online today.

The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.