Offset accounts surge as homeowners race to beat higher rates

Who wouldn’t want to save on home loan interest and pay off their mortgage faster? Homeowners are increasingly turning to offset accounts to do just that. So today we’ll look into whether an offset account could benefit you.

The recent RBA cash rate hike has led homeowners to embrace a variety of strategies to ease the rate pain, and it turns out one of the most popular options is a home loan offset account. One of the big 4 banks, NAB, says it is seeing “offset accounts surge” as homeowners, especially younger borrowers, look for low‑effort ways to beat rising rates.

According to NAB, three-quarters of its home loan customers now use an offset account. While homeowners aged 40 to 60 remain the biggest users of offset accounts, NAB says that among customers aged under 35, the number of offset accounts linked to new home loans has nearly doubled compared to last year.

Here’s why offset accounts are popular, the savings they can provide, and which homeowners benefit most from them.

How an offset account can save on loan interest

A bit of background first. An offset account is an everyday account linked to your home loan.

You don’t earn interest on money in the offset account. Instead, you save by paying less interest on your home loan. The offset account balance is deducted from your home loan when calculating interest, reducing the amount you’re charged.

For example, if you have a $500,000 mortgage balance and $20,000 in an offset account, you’ll only be charged interest on $480,000. Your monthly home loan repayment amount will stay the same – it’s just that more of your monthly repayment will go towards paying off the principal, rather than towards interest.

When this pattern is repeated month after month, the savings can potentially start to stack up. Over time, your home loan balance may be repaid faster, further reducing your monthly interest charges. In this way, an offset account has the potential to be a way to pay off your loan sooner.

How much could I save with an offset account?

The interest savings generated by an offset account will depend on the size of your home loan, the balance of the offset account, and your loan rate. Here’s an example of the possible savings that we’ve put together using one bank’s offset calculator (most banks have them readily accessible online, just google ‘offset account calculator’).

Let’s say you have a $500,000 mortgage with a 30-year term and an interest rate of 5.99% (comparison rate of 6.37%), plus $20,000 always sitting in your linked offset account. An offset account could save $90,571 in interest and make you mortgage-free 2.5 years earlier over your loan term.

What matters is that you talk to us to know exactly how much you could save with an offset account.

Who is an offset account well-suited to?

There’s a lot to love about home loan offset accounts. But they may not be the ideal option for every borrower. The more you have in an offset account, the greater the savings on loan interest. You must resist dipping into your offset account too often, as the funds are usually accessible on demand.

One way around this is to look for a lender that offers multiple offset accounts linked to the same home loan. This way, you can use one offset account for everyday money, and the others to save for personal goals – all while saving on home loan interest.

The other aspect to consider is that offset home loans can come with higher rates and fees. With limited savings, you might save more by choosing a lower-rate loan without offset account features. Consider whether money used in your offset account to pay off your loan sooner might be better invested elsewhere.

Refinancing – another way to save on interest

Offset accounts can be one interest savings hack. But you can’t simply add them to every home loan account – adding them can often mean refinancing. You could potentially cut even more interest by refinancing to a lower-rate home loan simultaneously.

If you’ve had your loan a while, consider refinancing to a lower-rate loan or one with better-suited features. The main point is that you don’t have to just wear a higher interest rate.

Call our Lending Specialists today to find out if an offset account is a good fit for you – and other strategies that could potentially help you save on home loan interest.

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