Based on above, the offset account delivers a savings of approx. $61k over 30 years and excludes any taxation impacts (generally tax would be paid on credit interest received) and assumes interest rates are consistent over the 30 years (extremely unlikely).
Do my monthly P&I (principal & Interest) repayments reduce with an offset account?
With a P&I loan, repayments will stay the same each month as the bank assumes an original loan term and ignores funds held in the Offset account when calculating the repayments. However, the loan will be paid off faster than the original loan term as less interest is being charged by the bank.
With an interest only loan, the greater the funds held in the Offset account, the less the monthly interest payments will generally be charged (assuming interest rates are constant) which provides free cashflow to put in the Offset account or direct cash towards other strategies.
Isn’t redraw on my home loan the same as an Offset account?
· Redraw (ie putting extra cash directly into the home loan to reduce the principal amount owing on the loan) can achieve the same result as an Offset account in respect to lowering the interest costs. However, redraw may create issues for you in the future depending on the purpose of the loan eg owner occupied vs investment. You should obtain tax advice when looking at redraw and whether redraw or an Offset account is a better structure to achieve your goals when looking at investment lending strategies.
Will a home loan with an offset account cost me more than a standard home loan?
- Typically Offset accounts are made available under Bank Packages, which includes cheaper/free credit cards, insurance etc. Package fees vary from financier to financier and based on the amount being borrowed, your broker can provide guidance on what is the best package and structure for you.
About the Author: Kevin Agent is one of the two Principals of The Australian Lending & Investment Centre (Australian Credit Licence 382715), an award winning Mortgage brokerage based in Melbourne Victoria. Kevin holds an MBA, Dip.FS(FP) and Dip.FS(FMBM) and has over 30 years in the finance industry including 23 years with a major bank.
Disclaimer: This is general credit advice. I would encourage you to sit with your credit advisor to understand the benefits of using an Offset account in your own individual situation and whether appropriate. Whenever doing investment lending, you should take separate tax advice to ensure the structure of your debt achieves the right outcomes and complies with Australian tax law.