An offset account is a bank account linked to the borrower’s home loan (i.e., mortgage). Just like standard bank accounts, borrowers can choose to have their wages deposited into their offset account. Unlike a traditional bank account, some of the balance on the offset account is deducted daily or at the borrower’s preferred frequency against the home loan principal, which also helps to bring down interest costs. Using an offset account actively saves borrowers upwards of hundreds of thousands of dollars and pays off their home loan months or years in advance.
Setting up an offset account. Most variable-rate home loans allow borrowers to open an offset account. Unfortunately, offset accounts are not a common practice with fixed-rate home loans, Mortgage Street fixed rate offset accounts allow $20,000 per year with no penalties. Borrowers with a split rate home loan may have an offset account connected to the variable rate portion of the mortgage. When setting up an offset account, it is in the borrower’s best interest to obtain a full, or 100%, offset account rather than a partial offset.
Associated costs. Most lenders will charge borrowers a monthly fee to maintain an offset account. Otherwise, an offset account may be offered as part of the mortgage package, and the borrower may only need to for it through their annual package fee.
Helpful features. Typically, offset accounts do not require a balance limit or have penalties for withdrawing or moving funds (i.e., Toggle). A debit card can be linked to the offset account to allow the borrower to make cash ATM withdrawals or make in-store or online payments. In other words, just like a standard bank account, borrowers have instant access to their offset account. Moreover, offset accounts accelerates the equity accumulated in the borrower’s home as the principal balance is paid down quicker, meaning a credit line or lump sum payment through an equity home loan sooner is possible to help pay off outstanding debt or planned expenses.