By reducing the interest payments on your home loan, you can pay off the principal amount faster and build equity in your property. One way to achieve this is through a “100% offset account,” a transaction account linked to your mortgage by your lender.
An offset account is a transaction account linked to your home or investment loan. It helps reduce the interest you pay by offsetting your loan balance with the money in the account. For example, if your loan is $400,000 and you keep $10,000 in your offset account, the bank calculates interest on $390,000 instead.
This setup benefits borrowers who want to save on interest while keeping their money accessible. Interest is calculated daily, so maintaining a higher balance in your offset account can lead to significant savings over time.
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How Offset Accounts Work
You use an offset account like any regular bank account. Deposit your income, and transfer money out to cover bills and expenses. The remaining balance offsets your loan principal, reducing the interest charged.
Let’s say you have a $200,000 loan and $30,000 in your offset account. You’ll only pay interest on $170,000. If you withdraw $2,000, your offset balance drops to $28,000, and interest applies to $172,000.
This method allows you to save on interest while keeping your funds flexible.
Using Household Income to Maximize Savings
Deposit your full household income into the offset account. Then, move only what you need to a separate account for bills. This strategy keeps your offset balance high and lowers your interest costs.
For example, if you and your partner earn $10,000 monthly and keep it in the offset account, you reduce your loan balance by that amount. Even after transferring money for expenses, the remaining balance continues to offset your loan.
Can You Link Multiple Offset Accounts?
Most lenders allow one offset account per loan. However, some offer the option to link multiple offset accounts by splitting your loan.
Suppose you split a $500,000 loan into two $250,000 loans. You link one offset account to each. If one account holds $25,000 and the other $10,000, your total offset is $35,000. You’ll pay interest on $465,000 instead of $500,000.
This setup offers flexibility and can help you manage your finances more effectively.
Learn more about and how they work with offset accounts.
Summary
Offset accounts offer a smart way to reduce home loan interest. By depositing your income and keeping a high balance, you can save thousands over the life of your loan. Whether you use one account or multiple, this strategy gives you control over your repayments and helps you pay off your mortgage faster.If you want multiple offset accounts linked to your home loan, you can split your variable rate loan into various loans. For example, you can split a $500,000 home loan into two loans of $250,000 each and link one offset account to one loan and another offset account to the other loan. This approach also applies to having three or more loans and offset accounts.
For instance, suppose you have a $500,000 home loan divided into two loans of $250,000 each, with one Offset account linked to each loan. You have $25,000 in one Offset account and $10,000 in the other. In this case, the total interest charged will be calculated based on the total loan amount of $500,000 minus the combined balance of both offset accounts, which is $25,000 plus $10,000.
Therefore, the interest will be charged on a balance of $465,000. A diagram can help illustrate this calculation:
Loan 1: $250,000 offset account 1: $25,000
Loan 2: $250,000 offset account 2: $10,000
Total loan balance: $500,000
Combined offset account balance: $25,000 + $10,000 = $35,000
Interest charged on: $500,000 – $35,000 = $465,000
