Using an offset account can potentially reduce the cost of interest on a home loan.

An offset account is a transaction or savings bank account that is linked to an existing home loan. The amount of funds in the offset account is used as a buffer against the outstanding balance of a home loan. When interest is calculated against the balance of the home loan amount, it is not charged against the ‘offset’ amount.

Here’s an example: Having a home loan of $500,000 and $50,000 in an offset account means that the loan interest is calculated at $450,000 instead. Over the course of a long loan period, using an offset account can result in thousands of dollars in cost savings.

  • Reducing the cost of interest – A financial commitment as large as a home loan typically incurs high-interest If used correctly, an offset account can help to reduce the cost of interest by a significant amount.
  • Flexibility of funds usage – Unlike direct repayments, the funds in an offset account can still be withdrawn whenever necessary such as in the event of an emergency. Of course, doing so means that only the remaining amount in the offset account will count towards the outstanding home loan amount. 
  • Faster loan repayment – Reducing the overall cost of interest for the loan means that individuals can potentially pay off the loan sooner with the same repayments.

How to Maximise The Value of An Offset Account

The impact of an offset account on the cost of interest can be increased by adding more funds into the account — more savings in the offset account will translate to a bigger buffer for the home loan amount.

  • Convert your savings account into an offset account. Doing so will allow your savings to effectively ‘earn’ the interest rate of your home loan, which will typically be higher than the rate of the savings account. You will still be able to access your savings as usual without worrying about ‘locking’ your finances up.
  • Deposit your earnings into the offset account. Every dollar counts in an offset account, and consistently adding to the account will result in greater savings on your home loan interest over time. Interest is calculated daily on an offset account, so even if the balance goes up and down with your day-to-day transactions, you'll still be ahead.

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