How does a home loan offset sub-account work?
This feature allows to you offset any cash funds you hold, including your salary, against your loan balance and save on interest.
Offset sub-accounts 101: Essential things you need to know
When entering the world of home loans, you’re going to hear about the wonders of offset sub-accounts. But what do these offset facilities do exactly? In this article, we’ve compiled an overview of what they are and how they can help you.
What is an offset account?
Also called an offset sub-account, it is a facility linked to your home loan. It functions as any normal transaction account would by allowing the withdrawal and deposit of funds.
The money in the facility is used to offset your home loan debt and reduce interest. The funds are subtracted from the principal amount on your loan, and your interest charge will be calculated based on the difference.
Offset sub-accounts are popular among borrowers as they can greatly reduce the interest paid over the life of the home loan. Even though offset sub-set accounts don’t earn interest like a typical savings account, your money works harder in an offset account.
How does an offset sub-account work?
An offset sub-account is used to lower the interest charge on your loan by, in a sense, reducing the amount you owe. The money you have in your offset is deducted from the balance of your home loan for the purposes of calculating your interest— assuming you have a 100% offset.
For example, you have a $500,000 balance on your mortgage, and you have $50,000 in your offset sub-account. Because of the funds in the offset sub-account, the daily interest charge on your loan will be calculated at $450,000, the difference between your loan and offset sub-account balances.
When you open an offset sub-account, you’re linking the funds with your home loan. If you fail to make any repayments, the money in the offset sub-account could be used to make up for the missing payment.
What is a partial offset sub-account?
A partial offset account, as the name suggests, reduces the amount you are charged interest by only a portion of the amount in the offset account. If you have $50,000 in a 50% partial offset account, it will reduce the interest calculated on the loan by $25,000.
Because of its limitations, partial offset accounts offer fewer benefits and are less popular amongst borrowers. If you’re interested in getting an offset sub-account, it’s best to find a home loan that offers a 100% offset facility, like loans.com.au.
How an offset sub-account affects your mortgage
Offset sub-accounts are more than just an additional feature of a home loan. Here’s how they impact your overall loan cost and repayments.
Does an offset sub-account reduce your principal?
Essentially, yes, an offset sub-account's primary purpose is to reduce the principal owed on your home loan. Because the offset sub-account is connected to your home loan, anything deposited into that facility offsets against your mortgage principal. The longer you keep money in an offset sub-account, the more interest you’ll save on the loan.
Does an offset sub-account reduce monthly repayments?
Your monthly mortgage repayments with an offset sub-account will still be the same, but more of it will go towards paying off the principal of your home loan rather than the interest. An offset sub-account can help you pay off your mortgage quicker with less interest while having the ability to access the money you have in your offset sub-account.
While an offset sub-account is effective for reducing interest, it only works if you keep the money there. If you take the funds out of the account, that amount of money you’ve taken out will be re-added to the loan balance.
Imagine having a $500,000 home loan with an offset sub-account of $50,000, If you withdraw $20,000 from the offset sub-account, your remaining account balance will be $30,000. Instead of paying interest on $450,000, you’d now be paying interest on $470,000.
Reasons an offset sub-account is worth it
Here are some of the perks you can get with an offset sub-account compared to other loan features.
What are the benefits of an offset sub-account?
An offset sub-account requires a bit of upkeep but is it worth all the trouble? Here’s a quick overview of the advantages of having an offset sub-account:
- Pay less interest. The interest on your home loan is calculated against the principal amount. The more money you have on your offset sub-account, the less you owe on your loan and the less interest you’ll have to pay.
- Pay off your home loan faster. More of your regular repayments go to paying the principal amount.
- Smart use of savings or extra funds. Money in an offset sub-account works harder as it reduces the interest you pay on your mortgage.
Offset sub-accounts vs Redraw facilities
Although offset sub-accounts and redraw facilities have similarities, there are a few key differences. Redraw facilities are usually offered on variable home loans. With a redraw facility, you can make extra payments into your home loan and redraw them if necessary.
If you made $50,000 worth of extra payments, you could withdraw that amount from your home loan and use it for something else.
The flexibility of the redraw facility varies between lenders. Some lenders allow instant online redraws, while others require an application request. You may also be charged a fee for each withdrawal, whereas other home loans offer unlimited fee-free redraws to let you draw upon your funds at any time.
Offset sub-accounts vs Savings accounts
Offset sub-accounts and savings accounts have distinct uses. When you put funds into a savings account, you’re earning interest there. Meanwhile, putting your money in an offset facility will reduce your loan balance on a home loan.
If you’re a property investor, using an offset facility instead of a savings account may be more tax-effective. Interest earned in a savings account is usually taxed at your marginal tax rate as it is considered income, while you aren’t earning anything in an offset facility.
Offset sub-accounts vs Extra repayments
Having funds in an offset sub-account is like making advanced payments on your home loan. Whatever money you have in the offset sub-account is deducted from your principal amount, after all.
When you make extra repayments, you’re chipping away at your principal loan. However, without any redraw facilities in place, you may have to pay additional fees and penalties.
Want an offset sub-account for your home loan?
At loans.com.au, we offer offset sub-accounts for homeowners and investors. In addition to the offset-sub account, we offer great loan features such as unlimited fee-free redraws, no monthly or ongoing fees, and full access to offset sub-account funds via a free VISA debit card, and more!
Speak to one of our lending specialists to discuss your home loan needs and learn about how an offset sub-account can benefit your financial goals. Or you can for a home loan apply online!
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
