When it comes to home loans, borrowers have a variety of features to choose from. Even basic loan packages can include an array of options. However, there is one particular feature that has captivated the interest of seven out of ten new buyers.
With rising interest rates and increasing living expenses, many homeowners are turning to home loan offset accounts to manage their financial burden effectively.
One of Australia’s major banks, NAB, reveals that almost 70% of its new home loan customers are choosing an offset account, up from 50% just two years ago. The reason is clear: it helps save on interest.
Understanding Offset Accounts
An offset account is usually a regular bank account (or multiple accounts) linked to your mortgage.
Rather than earning interest on the balance, the amount in the offset account is subtracted from the balance of your home loan when interest is calculated.
For example, if you have a mortgage of $400,000 and $20,000 in your offset account, you’ll only pay interest on $380,000 ($400,000 minus $20,000).
This can reduce your monthly interest payments. Since your regular repayment amount remains the same, more of each payment goes towards paying off the loan's principal. In turn, this reduces the interest on the following month’s repayment.
In fact, Macquarie Bank estimates that if you keep $20,000 in your offset account over the life of a 30-year loan with a 6% interest rate, you could save over $87,000 in interest and cut more than three years off your loan term.
Additionally, funds in the offset account remain accessible, so you can withdraw money for unexpected expenses when needed.
How to Make the Most of an Offset Account
The larger your offset account balance, the more you could save on interest.
According to NAB, a good way to increase your offset balance is by following the ‘three Cs’ approach: crediting, consolidating, and cutting back.
This method is working well for many homeowners. NAB reports a 55% increase in the value of its offset accounts since the pandemic, rising from $29 billion in 2020 to over $45 billion today.
Is an Offset Account Right for You?
Despite their popularity, offset accounts may not suit every borrower.
Offset home loans can sometimes carry a higher interest rate compared to basic loans, and if you don’t consistently maintain a good balance in the offset account, you might end up paying more in interest than you save.
Additionally, funds kept in an offset account could potentially be invested elsewhere, so you need to decide whether reducing your mortgage is your priority or if you’d rather focus on investments.
Not sure where to begin? Contact us today to see if a home loan offset account is the right move for you and how it can help you save on interest, especially if you’re located in Queensland, Australia especially in Townsville, Brisban, or the Gold Coast and considering options for refinancing.
To learn more, contact Premium Finance Group Australia at (07) 4720 8888 or email us at finance@pfga.com.au.
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