What is an Offset Home Loan Account?

An Offset Home Loan Account is a feature offered by most banks that allows borrowers to link their savings or transaction account to their home loan. The balance in the linked account is then used to offset the outstanding principal amount of the home loan. The interest is calculated based on the reduced loan balance, resulting in potential interest savings for the borrower.

How Does it Work?

Let's say you have a home loan of $400,000 and you link an offset account with a balance of $50,000 to it. In this scenario, the lender will only charge interest on $350,000 ($400,000 - $50,000). So, instead of paying interest on the entire loan amount, you pay it only on the net balance after deducting the offset account funds. This reduces the interest portion of your monthly repayments and allows more of your payments to go towards paying off the principal.

Key Benefits of an Offset Home Loan Account:

1. Interest Savings: One of the primary advantages of an offset account is the potential interest savings over the life of the loan. The more funds you keep in your offset account, the less interest you'll end up paying on your home loan.

2. Flexible Access to Funds: Unlike making additional repayments, funds in the offset account remain accessible to you whenever you need them. You can deposit and withdraw money without any restrictions, making it a convenient option for managing your finances effectively.

3. Pay off Your Loan Faster: By reducing the interest component of your repayments, you have the opportunity to pay off your loan faster than with a traditional mortgage.

4. Tax Benefits: In Australia, the interest you save with an offset account is not considered as taxable income, unlike interest earned in a regular savings account.

5. Reduce Loan Term or Increase Repayment Flexibility: You can choose to maintain the same repayment amount despite the reduced interest or keep the loan term the same and pay off your loan earlier.

6. Combine with Other Strategies: The offset account can complement other strategies like making additional repayments, helping you accelerate your journey to debt-free homeownership.

Who Can Benefit from an Offset Home Loan Account?

An offset account can be an excellent option for various borrowers:

• Homeowners who want to save on interest costs while keeping their savings accessible.

• Investors who seek to manage their cash flow efficiently, as interest saved can be used for other investment opportunities.

• Individuals with irregular income streams who wish to offset their mortgage interest during high-earning periods.

Consult with a LXD mortgage broker to explore whether an offset account aligns with your financial goals and helps you move closer to owning your dream home while optimising your finances.