What is An Offset Home Loan Account? Guide for Melbourne Homeowners

In Melbourne’s property market, every dollar counts. An offset home loan account can help you save thousands on interest by reducing your loan balance. But how do you make the most of it?

That’s where we can come in. Our experienced brokers will guide you through the benefits, setup, and strategy of using an offset account to maximise your savings.

In this guide, we’ll explain everything you need to know about offset accounts, from the basics to the potential savings. Let’s explore how you can use an offset account to take control of your mortgage in Melbourne.

What is an Offset Home Loan Account?

An offset home loan account is a transaction account linked to your home loan. The balance in this account reduces the amount of interest you pay on your home loan. How? By "offsetting" your loan balance.

Instead of earning interest on your savings, you save on interest costs by reducing the principal on which your home loan interest is calculated.

For example, if your loan balance is $500,000 and you have $50,000 in your offset account, you'll only be charged interest on $450,000. This can significantly reduce your interest payments over time, especially in a market with high property prices like Melbourne's.

How Does It Work?

Imagine your offset account as a regular transaction account where you deposit your salary and pay your bills. But unlike a standard account, every dollar you keep in there reduces the amount of interest you pay on your mortgage.

This means your money is working to lower your loan balance every day, helping you pay off your home loan faster.

Why Consider an Offset Account in Melbourne?

With Melbourne's property prices continuing to rise, many homeowners are looking for ways to reduce their overall borrowing costs. An offset account can be a smart choice, especially if you're disciplined about keeping a healthy balance in the account.

In 2024, Melbourne's median house price is approximately $915,000. With property prices at these levels, any tool that can reduce interest costs can be invaluable.

Offset accounts are particularly beneficial for those who expect to have significant savings or regular income that they can park in the account.

According to recent data from Domain, Melbourne's property market remains competitive, making it crucial to consider all available options for reducing mortgage costs.

Key Benefits of an Offset Account

Considering an offset account with your home loan can offer numerous advantages, especially if you’re working with a variable home loan. Let's dive into the key benefits that make this loan feature so attractive.

Interest Savings

The offset balance in your account directly reduces the amount of interest charged on your loan. By lowering your loan interest rates, this simple setup can save you a significant amount over the loan term.

Faster Loan Repayment

With reduced interest, more of your monthly repayments go towards paying off the principal. This means you can pay off your initial loan faster, cutting years off your loan term.

Flexibility with Your Finances

Unlike other loan features, an offset facility allows you to access your funds whenever you need them. This flexibility is perfect for managing both everyday expenses and unexpected costs without compromising on interest savings.

Reduced Monthly Repayments

By decreasing your loan amounts, an offset account can help lower your monthly repayments. This means less financial strain and more room in your budget for other priorities.

No Minimum Balance Required

Some savings accounts might require a minimum balance, but most loan offset accounts don’t. Every dollar you keep in the account works to reduce your loan interest without any strict conditions.

Compatibility with Variable Loans

Offset accounts are often paired with variable home loans, which can benefit from fluctuating variable interest rates. When rates drop, your loan rate discounts can lead to even greater savings.

Lump Sum Deposit Flexibility

If you receive a lump sum deposit, such as a bonus or tax refund, you can park it in your offset account. This boosts your offset balance, leading to immediate savings on your loan interest rates.

Expert Guidance

Navigating the details of lending criteria and credit criteria can be tricky. Working with loan specialists or a loan expert can provide professional advice, ensuring you maximise the benefits of your offset account according to your specific financial circumstances.

Case Study: How an Offset Account Saved a Melbourne Family Thousands

Let’s take a look at a real-world example. Meet the Smiths, a Melbourne family who recently purchased a home in Carlton for $1.2 million. They took out a $960,000 loan with a variable rate of 6.0%.

By using a 100% offset account and keeping an average balance of $100,000 in the account, the Smiths reduced their loan balance to $860,000, saving over $15,000 in interest in the first five years.

The Smiths managed this by depositing their salaries and any extra money into the offset account and using it for all their regular expenses. By diligently maintaining a high balance, they saved on interest and reduced the time it would take to pay off their loan.

Offset Accounts vs. Redraw Facilities: What's the Difference?

While both options reduce the amount of interest paid on your mortgage, an offset account is a separate transaction account linked to your loan, whereas a redraw facility allows you to make extra repayments on your loan and then redraw those funds if needed.

Key Differences:

• Flexibility: Offset accounts offer easier access to your funds. Redraw facilities may have restrictions on withdrawals.
• Tax Implications: Offset accounts can be more tax-efficient, especially for investors, as redraws could complicate tax deductions on investment loans.
• Account Management: Offset accounts function like regular savings or transaction accounts, while redraws are tied directly to the loan.

Are Offset Accounts Right for You?

Offset accounts can be a great option, but they aren’t for everyone. Here’s what to consider:

• Loan Type: Not all loans offer offset accounts. They are usually available with variable rate loans, and sometimes with fixed rate loans, but often at an additional cost.
• Fees: Offset accounts may come with higher fees than basic home loans, so you need to weigh these against the interest savings.
• Savings Habit: To maximise the benefits, you need to consistently keep a high balance in the offset account.

How to Maximise Your Offset Account

To get the most out of your offset account, it’s essential to implement smart strategies that align with your financial goals. Here are some practical tips to ensure you’re maximising your savings.

Direct All Income into Your Offset Account

Deposit your salary and any other income directly into your offset account. This allows your money to immediately reduce your daily home loan interest, generating significant compound interest savings over time.

Use Credit Cards for Monthly Spending

Instead of using your offset account for everyday expenses, use credit cards to pay for purchases, then clear the balance in full each month. This maximises the funds in your offset account, giving you more transaction offset and reducing your loan principal more effectively.

Make Extra Mortgage Repayments

Consider making extra mortgage repayments whenever possible. This reduces your outstanding loan balance faster, leading to greater loan term savings and lower overall loan interest payments.

Pay Bills Just Before the Due Date

Keep your money in your offset account for as long as possible before paying bills. By doing so, you maintain a higher offset balance, which further reduces your daily home loan interest and maximises your actual savings.

Choose Fortnightly Repayments Over Monthly

Opt for fortnightly repayments instead of monthly repayments if your lender allows it. This simple change can result in making an extra repayment each year, which speeds up loan principal reduction and increases loan term savings.

Review Your Loan Product Regularly

Keep an eye on your loan contract, particularly your current interest rate and standard interest rates. Regularly reviewing these Loan details with a mortgage offset calculator or with independent advice can help you identify opportunities for additional loan repayments or loan interest rate discounts.

Understand Tax Consequences for Investment Home Loans

If you have an investment home loan, be mindful of potential tax consequences. Seeking independent advice can help you navigate these complexities and ensure that your offset account usage aligns with both your Residential lending needs and investment home loan expenses.

Monitor Your Account and Adjust When Necessary

Use a loan offset calculator to regularly monitor the impact of your offset balance on your loan. Make adjustments to your strategies as needed based on eligibility criteria, prepayment thresholds, or relevant terms in your loan application journey.

FAQs

Do all home loans come with an offset account?  

No, not all home loans offer an offset account. They are most common with variable rate loans, but some fixed rate loans may also offer this feature, usually at an additional cost.

Can I access my money in an offset account anytime?  

Yes, offset accounts are fully accessible. You can withdraw or deposit money as needed, similar to a regular transaction account.

Is an offset account better than a redraw facility? 

It depends on your financial situation. Offset accounts are generally more flexible, while redraw facilities may offer lower fees but with more restrictions.

Are there any tax implications with offset accounts? 

For owner-occupiers, there are generally no tax implications. However, for investors, using an offset account can be more tax-efficient compared to a redraw facility.

What happens if my offset account balance is higher than my loan balance? 

If your offset account balance exceeds your loan balance, you won't pay any interest on the loan. However, most people won’t have such a high balance in their offset account.

Can I have multiple offset accounts linked to my loan? 

Some lenders allow you to link multiple offset accounts to one loan, giving you more flexibility in managing your finances.

What is a partial offset account? 

A partial offset account reduces the interest on a portion of your loan balance. For example, if your lender offers a 40% partial offset, only 40% of your offset account balance will reduce your loan balance for interest calculation purposes.

Wrapping Up

An offset home loan account offers a smart way to save on interest and pay off your mortgage sooner, especially in Melbourne’s competitive property market. By making informed choices and leveraging the right strategies, you can significantly reduce your loan term and build a more secure financial future.

If you’re ready to take the next step or have any questions, don’t hesitate to reach out. Speak with Jacob Decru, a trusted mortgage broker with over 20 years of experience, for personalised advice tailored to your needs. Call 0423 713 362 or visit JacobDecru.com.au to get started on your loan journey today.