Offset Savings Accounts for your home loan

No one wants to pay interest on their home loan, especially not when you realise that the amount of your monthly repayments which actually pays off the principal of the loan is tiny and most of your repayment goes to cover the interest. However, few of us have the luxury of an interest free loan and even fewer have the cash to pay for their home outright, and so the interest we pay on our home loans is simply the cost of doing business with the banks. However, that doesn’t mean you can’t minimise the interest you pay on your home loan, the bank will even help you with an offset account.

What is an Offset Savings Account?

An offset savings account is offered by the same provider who holds your home loan and is often opened at the same time your loan is activated. The offset account and the home loan account are linked, and the money you keep in your offset savings account directly reduces the amount of interest you pay on your loan each month.

Term Deposit	1 Month	3 Month	4 Month	6 Month	12 Month	24 Month	36 Month	60 Month	Min Deposit
Macquarie Bank Term Deposit	4.70%	5.60%	5.70%	6.00%	6.00%	6.25%			$10000
Suncorp eOptions flexiRates	4.25%	5.50%	5.70%	6.15%	6.35%		7.25%		$0

How an offset account works for you:

• The funds in your offset savings account are deducted from the loan total and reduce the interest. The funds in your offset account are not literally put onto your home loan, but they count towards the loan when your repayments are calculated. For example, if you have a home loan of $250,000 and you have $25,000 in your offset savings account for the month, your monthly loan repayment will only have interest charged on a loan amount of $225,000, where the money in your offset savings account reduces the loan amount which interest is calculated on.
• You can use your offset savings account for all your funds and deposits. If you have your wages, other income or investment returns paid to your offset savings account, all of your funds are going to be pooled to reduce your interest.
• Don’t use your offset savings account as a transaction account. The more money you have in your offset account for as long as possible, the more interest you can save; interest on your home loan is often calculated daily, depending on the bank, and the more days you have a high offset savings account balance, the less interest will be calculated on your loan. Therefore, use a credit card with an extended interest free period for all of your purchases in a month to allow your everyday funds to stay in your offset account. Once your loan repayment has come out, use the remaining funds to pay your credit card to zero and begin again by depositing all of your funds in your offset account and leaving them there.
• An offset savings account may also earn you notional interest. In the case where your linked offset savings account earns you notional interest, the interest earned on the savings in your offset account, matches the amount you have to pay on your loan, and notional interest is like an interest swap where the interest earned in your offset account pays for the interest payable on your loan.
• Offset savings accounts may require a minimum balance. If your offset savings account works directly against your home loan, or earns notional interest, the bank may require a minimum balance in your offset account. It is important to make sure you can meet this minimum balance each month to save on your home loan interest, otherwise your savings could be better suited to a separate high interest savings account.
• If you need to access the funds in your offset savings account you can. While the money in your offset savings account is working to reduce your home loan interest, you maintain at call access to the funds at all times. This means you can cover emergency expenses or take out cash when you are unable to use your credit card.

An Offset Account is Not Taxable

Where the interest earned in a high interest savings account must be declared on your tax return as income, the interest you save by having an offset savings account is never actually paid to you, so you’re not taxed on it. Instead of having the interest earned on a high interest savings account paid to you, an offset savings account passes the benefits directly to your home loan, reducing the interest you pay on your loan, reducing the principal of the loan faster and reducing the length of your home loan, while not ever paying you back any taxable income which you have to declare.

How to Get a Linked Offset Savings Account

For an offset savings account to directly reduce the interest you pay on your home loan, it must be a linked account from the same provider. An offset savings account is generally opened at the same time as you apply for your loan and this means you can start building the savings in your offset account from the beginning, reducing your home loan interest from the very start.