Offset facilities: The good, the bad and the savings

Every homeowner wants to know the secret to paying off their mortgage as quickly as possible. Is it hard work, effective savings or the right loan?

The truth is, homeowners can work and save as hard as they can, but without the right home loan, a lot of their effort can go to waste.

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Having an offset account attached to your home loan can help reduce the length of a home loan, says ME’s Head of Deposits and Transactional Banking Nic Emery.

Your savings could be earning the same interest as your home loan. Photo: Shutterstock

“Offset accounts stack up particularly well when it comes to the return your spare cash is earning,” he says.

“The interest rate on your home loan is almost certainly higher than the rate you’ll receive on a separate savings account.

“By using an offset account, your savings are effectively earning the same return as home loan rates – it’s just that this return goes towards paying off your loan rather than being paid to you as separate interest income.”

An offset account is a transaction account linked to your home loan. The amount in the transaction account is offset daily against the outstanding loan balance, which ultimately reduces interest payments on the loan.

There other major benefits to having an offset facility to your home loan.

Just like any regular transaction account, you can access your funds whenever you need. You can also link a debit or credit card to your offset facility, says Emery.

“An offset works particularly well in conjunction with a credit card, if you do all your monthly spending on the credit card and then pay if off with a direct debit from the offset,” he says.

While offset facilities work well for savers, they may not work as hard for those who aren’t organised with their savings.

In other words, if you don’t pile up your cash in the offset account there’s no point having one.

“Offset gives you easier access – but this can also be a downfall if you’re not disciplined,” Emery says.

Offset and redraw facilities often get confused because both aim to reduce the length of home loans by cutting interest repayments at the same time as allowing easy access to cash.

“Neither an offset nor redraw work unless you’re saving money,” Emery says.

“Both give you access to funds you’ve repaid – so provide a financial buffer in an emergency.”

The ME Basic Home Loan features a redraw facility and for the best of both worlds, the ME Flexible Home Loan gives you access to both a redraw and offset facilities.

Both loans don’t charge application or ongoing account keeping fees, meaning you save more.

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