How Does An Offset Home Loan Work?
Offset at a glance
At a glance, you can see the balance of both accounts. The amount you have in your savings account is 100% offset against the amount you owe, reducing the interest payable on your loan. And you still have complete access to your money in the savings account for your everyday expenses.
Is an Offset Loan right for you?
If you want to reduce the amount of interest you pay on your home loan, one option is an "offset" facility.
The way that this works is that, in addition to your home loan, you have a transaction account with the same financial institution. You deposit your income into the transaction account and use it for all your day to day expenses. Any money in this account is offset against the amount owing on your home loan and you only pay interest on the outstanding balance. So say, for example, that you have a home loan of $100,000 and you have a balance of $5,000 in your transaction account, you only pay interest on $95,000. Interest is calculated on a daily basis. It a great idea, a way that you can pay off your mortgage early and still have access to all your funds.
There is no doubt that, providing you are not paying any fee for the offset facility, its better to have than not have.
The other great advantage of an offset account is that you can pay your home loan off faster than the repayment schedule demands when you want to and then get your money back later on. But there is another way to do that, with a redraw facility.
Competition in banking means that, although basic variable rate products used to be very inflexible, if you know where to look you can now have the most important flexibility features. Basic variable rate products generally require a fax to the bank and the payment of a small fee of between $0 and $50 depending on the amount redrawn. The other disadvantage of a basic loan versus an offset loan, is that a basic loan does not allow you to receive the benefit of your savings being offset against your home loan thus reducing the amount of compounded interest you are charged daily.