Offset accounts are a popular tool for homeowners aiming to pay off their mortgage. Learn how they work and why they’re a smart option in Australia.
Purchasing a home in Australia is a significant financial milestone, but the journey doesn’t end there. For most homeowners, paying off their mortgage becomes a top priority. While there are several strategies to achieve this goal, one increasingly popular method is using offset accounts.
In this article, we’ll explore how offset accounts can help you pay off your home loan and why they’re an attractive option for homeowners in Australia.
Understanding Offset Accounts
An offset account is a financial tool linked to your home loan. The basic idea behind offset accounts is to help borrowers reduce the amount of interest they owe on their home loan. This is done by offsetting the balance of your home loan with the balance of your offset account.
Here’s how it works:
- Opening an Offset Account: When you take out a home loan, you can choose to open an offset account with the same bank or financial institution. This account is typically a regular transaction account.
- Deposit Your Savings: You deposit your savings, including your salary or any additional funds, into your offset account. The money in this account is then used to offset the principal amount of your home loan.
- Interest Savings: Instead of earning interest on the money in your offset account, you save on the interest you would otherwise be paying on your home loan. The balance in your offset account is deducted from your home loan balance, and you are only charged interest on the remaining amount.
- Tax Benefits: Another advantage is that the savings in your offset account are not subject to income tax, whereas interest earned in a regular savings account is typically taxable.
- Flexible Access: Unlike additional repayments or redraw facilities, you can access the funds in your offset account at any time without any restrictions. This flexibility makes it a convenient and attractive option for many borrowers.
Offset Accounts vs. Redraw Facilities
It’s essential to distinguish between offset accounts and redraw facilities, as they serve similar purposes but have significant differences.
Offset Accounts
- Savings are kept in a separate account.
- Funds remain easily accessible.
- No tax is paid on the interest saved.
- You can continue to earn interest on your savings.
Redraw Facilities
- Extra repayments are made directly into your home loan.
- Accessing the extra payments may involve restrictions or fees.
- Interest saved is not explicitly separated from your loan balance.
- No separate interest is earned on the extra payments.
The key difference is the separation of funds in offset accounts, which allows borrowers to save on interest while still having access to their savings.
How Much to Put in Your Offset Account?
Now that you understand how offset accounts work, the question arises: how much money should you put into your offset account to make a real impact on your home loan repayment? The answer depends on your individual financial situation, but here are some general guidelines:
- Maximise Your Savings: The more money you can put into your offset account, the better. Aim to deposit your entire savings, including your salary, into the offset account. The larger the balance, the more interest you’ll save on your home loan.
- Emergency Fund: Ensure you have an emergency fund outside of your offset account. This fund should cover unexpected expenses, such as medical bills or car repairs, to avoid dipping into your offset savings.
- Consider Your Expenses: Take into account your monthly expenses and bills. These will need to be paid from your offset account, so make sure you have sufficient funds to cover your living costs.
- Regular Contributions: Consistency is key. Make sure you set up regular contributions to your offset account, so you’re steadily reducing the interest payable on your home loan.
- Work With a Financial Advisor: If you’re unsure about how much to put in your offset account, it’s advisable to consult with a financial advisor who can assess your specific financial situation and provide custom guidance.
The Benefits of Offset Accounts for Paying Off Your Home Loan
Using an offset account to pay off your home loan in Australia offers several benefits:
- Reduced Interest: The most significant advantage is the reduction in interest payments. By offsetting your home loan balance with the funds in your account, you effectively pay less interest on your loan. This has become vital in recent years; current Finder reports indicate that many borrowers have been tapping into their offset accounts saved up during the COVID-19 pandemic to counter recent interest hikes. RBA and APRA data noted that the average balance Australians have put in their offsets ballooned from an estimated $72,563 as of April 2020 to as high as $105,430 three years later.
- Flexibility: You can access the funds in your offset account at any time. This provides peace of mind, knowing that your savings are still within reach if you need them.
- Tax Efficiency: Unlike interest earned in a regular savings account, the savings from your offset account are not subject to income tax.
- Faster Loan Repayment: By saving on interest, you can channel more of your funds toward the principal loan amount, speeding up your loan repayment.
- No Risk: Your savings in the offset account are secure, and you won’t risk losing money through investments or market fluctuations.
Conclusion
Offset accounts have become a powerful tool for homeowners in Australia seeking to pay off their home loans more efficiently. By using the balance in your offset account to offset your home loan, you save on interest payments, reduce the loan term, and gain more financial freedom. While the ideal balance for your offset account may vary depending on your specific financial situation, the more you can contribute, the more you’ll benefit from the reduced interest. With the right strategy, you can make significant progress toward fully owning your home.
DISCLAIMER: This article is for informational purposes only and does not constitute official financial advice. 2 Ezi is not affiliated with any bank or lender.
