In recent years, home loan products have continued to get better and better, and now many come with a host of features that can make a borrower’s life easier and save significant amounts of money.
One of the best features to consider when you take out a home loan or refinance is an offset account. It can help to lower your repayments and a way to help pay off your home loan faster.
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What is an offset account?
An offset account is effectively a savings account that’s attached to your home loan. It has all the benefits of a regular savings account, allowing you to deposit and make withdrawals. However, unlike a normal savings account, you don’t earn interest on your savings. However, you are benefiting as the interest on your savings is actually working to reduce the amount payable on the loan.
So how does an offset account work?
With an offset account, interest is charged based on the difference between your current home loan balance minus the amount linked to your offset. You will acquire a lower interest repayment when you link the two accounts.
Abacus Finance Example:
For example, Sarah currently owes a home loan amount of $100, 000 and she decides to elect to put $10, 000 in her offset account, she will effectively only pay interest on $90,000 if she uses an offset of 100%.
What makes it even better, is that she has full access and control over the $10, 000 in her offset account. The offset account acts just like a transaction or access account, and you can use it for everyday transactions.
Disclaimer: This case study is solely for educational purposes
These hypothetical case studies are provided for illustrative purposes only and do not represent an actual client or an actual client’s experience, but rather are meant to provide an example of the Firm’s process and methodology. An individual’s experience may vary based on his or her individual circumstances. There can be no assurance that the Firm will be able to achieve similar results in comparable situations. No portion of this article is to be interpreted as a testimonial or endorsement of the Firm’s investment advisory services and it is not known whether the hypothetical clients referenced approve of the Firm or its services.
Benefits of an offset account
Given how flexible an offset account is and because it can save interest, many people use it as the primary account to hold any spare cash, and some even use it as a savings account. Because the interest you’ll be saving will be greater than what you can earn from a savings account, it is a very effective option.
Likewise, having an offset account that you can use in conjunction with a credit card can make your money go even further.
For example, if you were to put all your monthly expenses on your credit card instead of paying for them in cash, you would find that you have quite a bit of spare money each month.
By leaving that money in your offset account over the course of the month, you’ll be saving interest. Given that most credit cards don’t need to be paid off for 30-45 days, the credit card company is effectively helping you save interest on your home loan
Choosing Offset or a Redraw account?
Some of you might ask, which is a better option – an offset account or a redraw facility?
In essence, both will deliver the same outcome, assuming it is a 100% offset account. However, the real advantage of an offset account over a redraw facility is that you have full control of your funds.
Given that an offset account is basically a transaction account, you can move money around at any time and take advantage of things like paying bills with credit cards.
A redraw facility is still at the discretion of the bank, and there are often limits on the number of redraws you can make over a given period of time. There can also be costs involved.
The next time you’re looking at taking out a new home loan or refinancing, you should speak to a lending specialist at Abacus Finance about finding a home loan product with an offset account. There are far more benefits than meet the eye, and they can save you a significant amount of money over time.
The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.