How To Compare Offset Account Home Loans

When you think about Home Loan, what do you think of first? Which aspects of Home Loan are important, which are essential, and which ones can you take or leave? You be the judge.

Offset Account Home Loans

What is an offset account home loan?

Offset account home loans provide a transaction account that is directly linked to the home loan. The amount of the account is "offset" against the amount of your home loan. You are charged interest on the balance of the home loan minus the amount in the offset account, rather than on the entire sum of the home loan.

For example, suppose that you have a $300,000 home loan at an interest rate of 9%. You currently have $20,000 in your offset account. The $20,000 is subtracted from the outstanding balance on your loan ($300,000), and you are left with $280,000. You will be charged interest based on $280,000 rather than $300,000. That means the interest on your home loan is 9% of $280,000 ($25,200) rather than 9% of $300,000 ($27,000).

Offset accounts work just like any other transaction account. Having your salary deposited into the offset account is the best way to take full advantage of it. Like any other transaction account, you can access your money via ATMs, bank branches or cheques.

Offset Account Home Loans come in 2 forms: Full offset accounts and partial offset accounts. Full offset accounts will provide the most advantages of the two. The interest rate of your home loan is the same as the balance of your savings account in a full offset account. Like the example above, that means you are earning the full 8% home loan interest rate on your offset account balance.

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Partial offset accounts have a lower interest rate paid against your account balance. It still helps to reduce the balance of your home loan for interest calculation purposes, but to a lesser degree than a full offset account home loan.

What are the benefits?

Offset accounts allow you to pay off your home loan faster because you save money throughout the term of your home loan. You make larger payments towards the principle of your loan, so you pay off your loan faster. Despite the fact that your interest is calculated on the reduced amount, your monthly payment is still based on the full amount owed on the home loan. Offset accounts are also tax-exempt, as the interest earned is not calculated towards taxable income.

What are the drawbacks?

Offset account home loans have many benefits, but one of the major disadvantages is the high interest rate when compared to regular home loans.

A second disadvantage is the account balance that must be maintained in for the amount of your loan to be reduced. The minimum balance requirement and high interest rate could potentially cancel out the benefits for people who can only place a small amount of money into the offset account.

Of course, it's impossible to put everything about Home Loan into just one article. But you can't deny that you've just added to your understanding about Home Loan, and that's time well spent.