Is an offset loan right for you?
Offset loans are a common and popular type of loan, and can save you a significant amount of money over the life of your loan. Many borrowers choose this type of loan thinking the financial rewards will automatically flow. For lots of people, however, this simply isn’t the case.
Offset loans explained
An offset account works like a regular savings account, except it is attached to your home loan. When this offset account has money in it, that balance is subtracted from your loan balance.
For example, if you have a $500,000 home loan and your day-to-day offset account has $50,000 in it, then your interest payments are calculated on a loan of $450,000. In this example, and with a 5% interest rate, you’d save $268 a month in interest whilst still paying the same payment each month which means you will pay your loan off early. Pretty good!
Pros and cons
Offset loans come with an annual fee, which is typically around $400. Every single year. This fee includes loan application fees as well as bank account and credit card fees. These days, the interest rates for offset loans are a fraction higher their basic counterparts too.
If you don’t choose an offset account and take out a basic variable home loan, a few things change. On the bright side, you won’t pay ongoing fees. In fact, most loans at the moment don’t even charge an application fee. Plus, there’s usually a slightly lower interest rate and you can store your savings inside the loan and save interest. But, of course, you miss out on the slightly lower amount of interest you’d pay each month with an offset account, because your salary account balance is not being counted as payment on your loan.
Whether your loan is offset or basic, you’ll still have access to redraw. This simply means that if you pay more off your loan than the minimum amount required, including using your home loan as a savings account, you can access that money later on. Say you pay an extra $50 a month off your loan, not only will you pay a bit less interest, you’ll also have access to $600 a year for emergencies.
Offset or basic?
Choosing the best loan structure is all about how much you can save and the annual fees your lender charges you. Recently, we have been delving deeper into the benefits of offset loans, and it’s yielded some interesting results.
If you’re on a reasonably high income and can regularly hold a high balance in your day-to-day bank account, offset loans are great. For many people, however, this isn’t the case. Here’s the maths:
If your average savings account balance is $5000 and your home loan has a 3% interest rate, you’ll save about $150 a year on interest payments with an offset account. This sounds pretty good, until you remember that annual fee of $400. Suddenly you’re out of pocket $250, as well as paying a slightly higher interest rate for the privilege. Thanks for nothing!
Even a $10,000 average bank account balance doesn’t cover your costs. In fact, you’d need an average daily balance in the offset account of around $12,500 just to cover that $400 annual fee.
If you’re in a similar financial situation, but like the idea of saving on interest, remember that there’s always the redraw facility. If you get extra income at any point, putting it straight on your home loan is an excellent way to save a bit of interest while still having access to that extra money if you need it.
Consult your mortgage broker
If you have a savings account that is always at around $20,000 or more, offset accounts are probably the right option for your variable-interest home loan. Anything lower than that and it’s worth a free, no obligation call to us. At Mortgage Broker Melbourne, we will look at your current financial position and savings history and advise you on the best loan to suit your individual circumstances.
Whether it’s an offset loan or a basic variable home loan, we can help find the right loan for you, and even fill out the paperwork to secure the loan you need, saving you time and hassle. Contact us today!
Marc has been a professional lender for 28 years. After beginning his career in 1990 with a UK Building Society, he moved to Australia where he held several different retail banking roles. In 1999 it became clear to him that a mortgage broker would eventually become an obvious choice for someone looking for a home loan so he took the plunge and became an independent broker. He hasn’t looked back since!