Offset accounts are just one of the more popular words you'll hear when applying for a home loan.

And there's a reason for this popularity as along with interest rate rises and refinancing, offset accounts can be a big budget winner for you.

What is an offset account?

An offset account is a typical savings account, complete with a debit card, and which you can regularly or just occasionally.

But, unlike your typical savings account, offsets are directly linked to your home loan and all cash you withdraw or deposit in your offset affects your home loan.

How does an offset account work?

Let's say you've taken out a $250,000 loan with your lender and deposited savings of $20,000 into your linked offset.

This is when the financial power of offsets now comes into play, because as the name suggests, your offset cash will offset the interest charged on your home loan principal.

So, in this suggested case, you will only be charged interest on a $230,000 loan rather than a full $250,000 loan.

This lesser interest also lessens the life of your loan, making your home fully yours much sooner - and all while you can basically set and forget, with your offset funds bubbling away in the background of your life and your loan.

But wait, there's more!

The more money you pour into your offset, the more you save on your home loan interest!

So go crazy with adding to your offset funds, using it for your weekly salary; any extra cash that comes your way, and even spare coins, plus of course, your savings.

Another great way to make your offset work for you is to only pay your bills on the due date rather than earlier.

Why?

That bill money you've set aside in your offset will work harder, and longer if you wait until the bill's due date.

All of these reasons are why most offset fans use their offsets every day and in every way; others use it as their major savings account for holidays or emergency rainy days.

NB: You can utilise your offset account much as you would your average bank account. But be aware that when you redraw offset cash - say, for the weekly groceries - your lesser offset funds will mean your home loan's interest rate is larger.

What's the difference between an offset account and redraw facility?

We talked about both offset accounts and redraw facilities earlier this year but this is a key question when thinking about offsets so we're happy to do a quick run-through again!

Offsets and redraws are certainly similar concepts but here's the 411 on redraw facilities:

• as the name suggests, they allow you to redraw - or take back - any extra repayments you've made on your home loan 
• unlike offsets, you may not be able to obtain such redraws immediately
• lenders may limit the number and figure of redraws as well as charge fees for them
• however, the cash in your redraw facility still reduces the interest on your loan
• redraws are best for people who are confident they'll often be making extra payments on their home loan
• they're not best for people with little self-control who may be tempted to redraw for non-emergencies 

Personally, between redraws and offsets, I prefer the latter as I don't want to be tempted to redraw from my loan - and that's even though I fully intend to make extra repayments. 

But of course, it all depends on what suits you and you can often easily obtain both redraws and offsets for your loan, depending on your lender.

Are there different types of mortgage offset accounts?

Yes: 100% offset accounts and partial offset accounts.

100% offsets are the most common type of offset account and see 100% of your offset balance used to deduct interest from your loan amount. Aim for this type of offset if at all possible.

With partial offsets, only part of your offset balance (usually 40% or 50%) is considered when offsetting the interest on your home loan principal. These offsets are still worthwhile but obviously not as worthwhile as 100% ones.

Are there fees for an offset account?

Yes.

You may encounter fees of around $10-$15 per month for offset accounts, but this figure will depend on your lender.

You may also be charged higher interest rates on a loan with an offset account.

However, the good news is that this fee could be offset by the power and energy of your offset account overall, with money you save by having an offset negating your extra fees.

Can I always obtain an offset account?

No.

Fixed-rate loans generally don't offer offset features.

But if you're taking out an investment home loan, by all means, investigate offsets as in some cases, you could enjoy some extra tax benefits.

Should I put savings into an offset account or repay my home loan?

It depends.

If you'd like some flexibility with your savings, deposit them into your offset account.

If you want to repay your loan hard and fast, send them straight to your home loan.

Or, you could send some savings to your offset and some savings to your home loan.

But either way, you'll be saving money.

What are the benefits and disadvantages of an offset account?

Benefits:

• Save/earn you money in the background of your life
• Lessen the life of your loan
• Easy to use every day, or whenever suits you
• Withdrawn funds available immediately
• Potential tax benefits

Disadvantages:

• Extra lender fees, and possibly interest rates
• Only available with variable rate loans, rather than fixed-rate loans
• Financial discipline required
• Best to have a large deposit that doesn't move from the offset

Is an offset account a good idea for me?

That's entirely your call!

You may prefer a redraw facility or your current, everyday savings account particularly if your lender's offset fees are high.

But as we've said, every cent counts - literally - when it comes to your offset account and how much it can save you over time.

It's certainly worth thinking about when you come to home loan time.

We're here to help

Whatever home loan road you wish to take, we’d love to help you travel it!

We can find you the best home loans from more than 40 of Australia’s biggest banks and specialist lenders and we can also help you refinance your loan to help you keep more money in your pocket.

So, give us a call today at Lending Loop.