Smart hacks to use an offset account with your home loan

If you're a first home buyer in Victoria, you've probably heard about offset accounts but might be wondering if they're worth it. The short answer? They can be a powerful tool to help you save thousands in interest and potentially pay off your first home loan years earlier.

Let's break down what offset accounts are, how they work, and whether one might suit your situation as you prepare your home loan application.

What is an offset account?

An offset account is a transaction account linked to your home loan. The balance in this account is 'offset' against your mortgage balance, which means you only pay interest on the difference.

Here's an example: if you have a $400,000 home loan and $20,000 sitting in your offset account, you'll only pay interest on $380,000. Your repayments stay the same, but more of your money goes towards paying down the principal rather than interest.

Unlike a redraw facility where you pull money out of your loan, an offset account keeps your savings separate but working for you. You can access your money anytime without affecting your loan structure.

How offset accounts help first home buyers

When you're buying your first home, every dollar counts. Here's how an offset account can work in your favour:

1. Reduce interest payments: The more you keep in your offset account, the less interest you pay on your home loan
2. Maintain flexibility: Your savings remain accessible for emergencies or opportunities
3. No additional tax: Unlike earning interest in a regular savings account, offset savings aren't considered taxable income
4. Pay off your loan faster: By reducing interest charges, more of your repayment goes towards the principal

For first home buyers working with a tight first home buyer budget, this flexibility can be invaluable during those early years of homeownership when unexpected expenses often pop up.

Offset accounts vs redraw facilities

Many first home buyers get confused between offset accounts and redraw facilities. Here's the difference:

An offset account is a separate transaction account. You deposit your salary, pay bills from it, and the balance offsets your loan daily. You have complete control over the funds.

A redraw facility lets you withdraw extra repayments you've made on your loan. However, some lenders restrict redraw access or charge fees. The money is technically part of your loan, not a separate account.

For most first home buyers, offset accounts offer more flexibility and control, though they may come with slightly higher interest rates.

Variable vs fixed interest rates and offset accounts

Here's something important to know: offset accounts typically only work with variable interest rate home loans. If you're considering a fixed interest rate for certainty in your repayments, you'll usually need to forgo the offset feature during the fixed period.

Some lenders offer split loans, where you fix a portion of your home loan and keep the rest on a variable interest rate with an offset account attached. This gives you the security of fixed repayments while still enjoying some offset benefits.

When comparing home loan options, consider your financial situation and goals. If you expect to have substantial savings, a variable rate with an offset might work better than locking in a fixed rate.

Making your offset account work harder

Once you've set up your offset account, here are some strategies to maximise its benefits:

1. Deposit your salary directly: Have your entire pay go into the offset account, even if you plan to spend it. Every day it's there, you're saving on interest
2. Pay expenses on credit card: Use a credit card for daily expenses (paid off in full each month) to keep more money in your offset account longer
3. Time your bills: Pay bills on their due date, not early, to maximise your daily offset balance
4. Build an emergency fund: Your offset account is the ideal place to keep 3-6 months of expenses

These strategies work particularly well if you've used the first home super saver scheme to build up some initial savings.

When you're applying for a home loan

As you complete your first home loan application, discuss offset account options with your broker. Not all lenders offer them, and the terms can vary significantly.

Consider these questions:

• What's the interest rate difference between loans with and without offset accounts?
• Are there account keeping fees?
• Can you have multiple offset accounts?
• What happens to the offset during any fixed rate period?

If you're using a low deposit option like a 5% deposit or 10% deposit, you'll likely be paying Lenders Mortgage Insurance (LMI). An offset account can help you build equity faster and potentially refinance sooner to remove LMI costs.

First home buyer eligibility and offset accounts

Good news: having an offset account doesn't affect your first home buyer eligibility for grants or concessions. Victorian first home buyers can still access first home owner grants (FHOG) and first home buyer stamp duty concessions regardless of whether their home loan includes an offset account.

If you're considering the Regional first home buyer Guarantee or the First Home Loan Deposit Scheme, check with your lender about offset options. Some guarantee schemes have specific lender panels, and not all participating lenders offer identical features.

Is an offset account right for you?

Offset accounts suit first home buyers who:

• Expect to maintain a healthy savings balance
• Receive regular income deposited to their account
• Want flexibility to access their savings
• Are disciplined enough not to spend money just because it's accessible

They might not be ideal if:

• You're unlikely to maintain much of a balance
• You prefer the 'out of sight, out of mind' approach to saving
• The higher interest rate outweighs potential savings

As part of your first home buyer checklist, calculate whether the offset benefits justify any additional costs. Your mortgage broker can run scenarios based on your expected savings and spending patterns.

Getting started with your first home loan

Before you apply for a home loan, it's worth getting pre-approval to understand your borrowing capacity and streamline your property search. This also gives you time to discuss offset account options and structure your loan correctly from the start.

Remember, buying your first home is a significant decision, and the loan structure you choose can impact your finances for years to come. Taking time to understand your home loan options, including features like offset accounts, puts you in a stronger position to build wealth through property ownership.

An offset account can be a valuable tool in your financial toolkit, helping you reduce interest, maintain flexibility, and reach your goal of owning your home outright sooner. Combined with Victorian first home buyer grants and concessions, you'll be well-positioned to make your first home purchase work for your financial future.

Ready to explore home loan options with offset accounts? Call one of our team or book an appointment at a time that works for you. We'll help you find a loan structure that matches your goals and sets you up for success as a first home buyer.