An offset account is a personal transaction account linked to a home loan. The more money you have in the account, the less interest you pay on your mortgage.
A bank offers offset accounts based on the type of loan product you select. A 100% offset account is available for variable rate loans, whereas a partial offset account is available for fixed-rate loans.
How Does Partial Offset Work?
In a partial offset account, banks offset only a portion of your total account balance against your principal.
The partial offset is calculated as either a percentage or a fixed amount.
Example 1: Partial Offset As Percentage
Suppose you have $100,000 in your partial offset account, your bank gives a 40% offset and your home loan amount is $800,000.
To calculate the interest payable, the bank takes $760,000 instead of $800,000 as the principal amount. This is because the bank has offset 40% of your account balance ($40,000) against your remaining principal.
If your annual interest rate is 1.9% and your loan term is 30 years, making standard repayments you save a total of $12,506.
Example 2: Partial Offset With Fixed Amount
Suppose you have $100,000 in your partial offset account, your bank gives a $65,000 offset, and your home loan amount is $800,000.
To calculate the interest payable, the bank takes $735,000 instead of $800,000 as the principal amount; the bank has offset $65,000 from your total home loan.
If your annual interest rate is 1.9% and your loan term is 30 years, making standard repayments you save a total of $20,323.6.
Partial Offset Accounts In Australia
Partial offset is a rare feature available with fixed-rate loans.
In Australia, only a few lenders offer a specific partial offset account, known as the 40% partial offset account. Any other type of partial offset is unheard of here.
Pros And Cons Of Partial Offset Accounts
The pros of a partial offset account are as follows:
- Reduces your total repayment amount: The more balance you have in your partial offset account, the less monthly interest you have to pay. Maintain the balance for the entire loan term, and you will save a hefty sum in interest repayments.
- Unrestricted access to funds: The money in your partial offset account isn’t frozen like fixed deposits. You can treat this account like a regular transaction account.
- Tax benefits: Any amount of money you keep in the partial offset account doesn’t earn interest. So, the difference in repayment enabled by the offset balance isn’t taxed.
The cons of a partial offset account are as follows:
- Higher interest rates: The interest rate offered by some lenders can be slightly higher than usual for fixed home loans with partial offset accounts.
- A 100% offset account is better: A 100% offset account gets you a higher interest repayment discount, as all of your balance is factored in.
- Need to have a large balance: If you do not maintain enough (or any) money in your offset account, you will not get to make a discounted interest repayment.
Partial Offset Vs Redraw: Which Is Better?
With a partial offset account, you can reduce the interest you pay.
With a redraw account, you can make extra repayments.
Because a partial offset account is also a regular transaction account, your funds are easily accessible. Unlike a redraw facility, you do not have to worry about paying additional fees or withdrawing a required minimum amount. So, in general, a partial offset account is preferable to a redraw account. That being said, which of the two accounts is better for you is a matter of personal preference.
Why choose a partial offset account?
You choose a partial offset account if you prioritise reducing your repayment over reducing your loan term. So, if you are confident of having a stable income for the term of the loan, you opt for a partial offset account.
Why choose a redraw account?
You choose a redraw facility if you are keen on reducing your loan term. Though you don’t save any money in repayments, you get the flexibility to make extra repayments any time you want.
Making extra repayments clears out your loan faster. With redraw, you also have an option of claiming back the additional repayment you made at any point in your loan term.
Apply For A Fixed Rate Loan With A 40% Offset Account
Our mortgage brokers can help find a lender offering partial offset accounts with fixed loans that suits your needs.
Please call us on 1300 889 743 or complete our free assessment form to start your home loan journey.