If you have a variable rate home loan with the option of linking an everyday banking account for 100% offset, here are a few ways to make sure that you’re using it to save as much interest as you can.
New to offset? Learn the basics from our Banking Products blog post: Your everyday banking account can reduce your home loan interest.
Get as much money in your offset as you can and keep it there for as long as possible
Every dollar in your linked everyday banking account saves you interest every day that it’s there, so it makes sense to keep your balance as high as you can. That’s because interest is calculated daily, so the longer you leave the money in your account the better off you’ll be.
Have your salary or wages paid into your offset
By having your employer send your pay directly into your linked everyday banking account, you’re making sure that the money you earn immediately reduces the interest you pay on your home loan. You can still access and spend your money like usual.
For example, $10,000 sitting in your everyday banking account for the life of your loan could save you $46,319 and help you to pay off your loan much sooner. (These savings are calculated on an interest rate of 7.22% per year and a 25 year loan term.)
Use your credit card for everyday purchases
Every dollar sitting in your linked everyday banking account matters, so taking advantage of interest-free days on your credit card can help you save money. Rather than spending money from your everyday account, use your credit card throughout the month for your purchases. This maximises the amount in your offset account and makes your money work harder.
You just need to ensure that when your credit card is due, use the money in your linked everyday banking account to pay the closing balance (in full) and avoid paying interest on your credit card.
If you have a rewards credit card, you’ll also be earning your rewards points.
Got some spare money? You’ll pay less interest with offset than you’ll earn with a savings account
You might be thinking that you’d rather have your money earning interest in a savings account rather than offset.
It’s nice to see your money earn interest, but you’re generally better off going with an offset account.
The interest you save with an offset will generally be worth more to you than the interest you could earn with a savings account. On top of that, any interest you earn through savings is usually taxable, but anything you save through offset isn’t as no interest is earned (you should check this with your own tax advisor).
Let’s look at your options if you have $20,000 that you want to keep at hand. Let’s assume your variable rate on your home loan is 7.5% pa. and your online savings account earns you 4.40% pa. in interest:
- keep it in your online savings account and earn $73.33 a month in interest (which you’ll probably have to pay tax on), or
- put it in a linked everyday banking account for 100% offset and save $125 in home loan interest over the same month.
Even before you pay tax on your savings interest, that’s a difference of over $50 each month. If you saved this much over a year, you’d be up by $620. At tax time you would also need to declare the interest you have earned. For example, if you were taxed at an average rate of 25% of your savings interest, the difference would go up to $840.
Term deposits vs discounted home loans
Even if you boosted your investment by using a high-paying term deposit, you’re still likely to be better off with offset. And that’s before you consider that this term deposit could lock your money away for as many as five years.
When offset might not be right for you….
Usually offset is the most convenient way to save yourself money on your home loan, but there are some exceptions and part of getting the most out of offset is knowing when it’s not your best option.
Another way to reduce the interest on your variable rate home loan is to make extra repayments. There is no difference in the money that you will save compared to using your offset, but there are some instances where making extra repayments to reduce your home loan balance can be a better option for you. For instance, when:
- you want to increase the equity in your home
- you want to reduce your loan repayments.
If your loan allows you to redraw your money when you are ahead on your repayments, making extra repayments can also help you keep track of your savings. Instead of having your savings sitting in your offset account where you have much easier access to it, you can transfer the savings into your home loan and have peace of mind that it is out of sight and out of mind. You will still be able to redraw these funds when you need it.
Not using offset yet?
Check that your loan offers offset – not all of them do. If your home loan is eligible, linking a new or an existing everyday banking account is easy to set up by contacting the bank. If you have an existing account you’ll keep your account number and any payments you already have set up won’t change.
You can generally only get offset on variable loans, or on the variable portion of your loan. So if you have a split home loan (meaning part of your loan is fixed and part of your loan is variable), you can usually link an offset account to the variable part.
Options if your loan doesn’t offer 100% offset
If you have a fixed rate home loan, your options may be more limited. At the end of your fixed rate period your loan will shift onto a variable interest rate, or you’ll have the option of splitting it into fixed and variable parts. When this happens you can consider getting an offset account.
Got any more questions about offset? Leave us a comment and we’ll get back to you.