Taking out a loan has almost become a necessity for every homebuyer. Currently, most banks’ variable loan interest rates are around 5.50% – 6.50%, a significant increase from 2.0% just two or three years ago. This has brought considerable repayment pressure to homeowners. However, many people don’t realize that there are tools and methods to help you pay off your loan earlier while saving tens of thousands in interest costs. Goldsource Finance introduces a simple tool: the Offset Account, which helps you save on housing loan interest and shorten repayment time.
What is an Offset Account?
An Offset Account is a day-to-day transaction account linked to your home loan account. As the name suggests, it “offsets” the loan amount by using the balance in the offset account to reduce the principal of your loan, thereby reducing the interest payable. Because interest on variable-rate loans is calculated daily and settled monthly, the deposit in the offset account can reduce the outstanding loan balance, resulting in lower interest payments.
An Offset Account allows you to use your income or savings to reduce the interest on your home loan, thereby increasing the repayment of the principal amount and shortening the loan term, helping you pay it off faster.
Example:
Suppose your loan amount is $500,000, and you open an offset account with $50,000 deposited. You would only need to pay interest on $450,000.
For instance, at Commonwealth Bank (Comm Bank), if you have a $500,000 home loan with a 30-year term and a standard variable rate of 6.34%, you would pay approximately $617,264 in interest. By opening a linked offset account and maintaining a $50,000 balance, you could pay off the loan 5 years and 9 months earlier and save $214,758 in interest.
The Three Major Benefits of an Offset Account：
1. Maximizing Interest Savings
By depositing surplus cash into the offset account, it immediately starts offsetting loan interest, as interest is calculated daily.
Many think saving in a traditional savings account is beneficial. However, the interest you save using an offset account is often more valuable than the interest you earn in a savings account.
Example:
Loan rate: 6.34%; Savings account interest: 3.50%. $50,000 in a savings account earns $145.83/month (taxable). $50,000 in an offset account saves $264.17/month in loan interest. The difference is $118.37/month, or $1,420/year
。
Offset accounts are flexible—money can be deposited or withdrawn at any time, but the balance reduces your loan interest.
Maximized Financial Flexibility
An offset account is a transaction account, so you can freely deposit and withdraw funds. Any withdrawn amount will incur interest at the loan rate starting that day. Extra funds can be redeposited to offset interest.
Emergency Fund
Offset accounts serve as an emergency fund. If your finances become tight, you can use the cash in your offset account. While it’s not a long-term solution, it’s extremely useful for emergencies.
Tax Benefits
According to Australian tax laws, interest earned in a savings account is taxable. Directly depositing extra funds into a home loan account reduces the loan principal but can also decrease tax deductions.
Funds in an offset account are not subject to tax, ensuring you maximize tax deductions. (Consult a professional accountant for specifics.
How to Make the Most of an Offset Account
- Direct Debit Income: Have your salary, rental income, or other earnings deposited directly into the offset account. The funds immediately help offset interest and shorten your loan term.
- Minimize Risk: Avoid using your offset account as your primary bank account. Transfer surplus funds regularly to your offset account for interest savings.
- Product Flexibility: Not all banks offer 100% offset accounts, so check with your bank or broker. Goldsource Finance can assist you.
- Fixed vs. Variable Rates: If you’re worried about rising interest rates but still want offset benefits, consider a split loan—part fixed, part variable. This way, you enjoy fixed interest stability while maintaining offset flexibility.
Want to know which strategy suits you best? Need more details? Call Goldsource Finance at 0412 632 861 to consult our professionals.