Understanding Offset Accounts in Home Loans

CochazoTuc on 29/02/2024 - 11:24
Last edited 29/02/2024 - 11:56

Hi All, I'm reaching out to gain a deeper understanding of how offset accounts function within the framework of a home loan. Currently, I'm with uBank, with 40% of my loan on a fixed rate (which is due to expire in a few months) and 60% on a variable rate at 6.04%.

Over the past few months, I've been transferring some savings into the offset account (in the variable rate part of the loan), given that in theory, a 6.04% return without having to pay tax on the earnings seems more beneficial than what I was getting from my other banks.

However, I've started to grow concerned about how these offset savings are impacting my repayments. I've noticed that my monthly payment amount remains unchanged, as does the monthly interest charge (and this has been consistent for the past 3-4 months). This leads me to question - where exactly is the income generated by the offset account going?

Can anyone share their experiences or insights into what I should expect when depositing money into my offset account? Have you noticed any significant changes in your statements?

I'm looking to gather as much information as possible before I reach out to the bank for further clarification.

Thank you in advance for your help!

—- UPDATE —-
It appears that I have a redraw account - could this be the reason for it? I've noticed that the available amount decreases slightly each month

Financial Home Loan

Comments

  • ste616 on 29/02/2024 - 11:33
    +11

    Your monthly payments won't change when you put money in the offset account, as you still need to be paying off your loan account at the agreed upon rate. However your monthly interest charge should definitely be lower. With my loan, my monthly interest charge line item comes with a note that says how much lower it is due to the money in my offset account. I would check first if your offset account really is linked to the appropriate loan account.

    • djkelly69 on 29/02/2024 - 11:35

      Agree with this, interest amount should be reduced. I would be calling to make sure the offset isn't linked to the fixed loan, which might explain why nothing is happening.

    • CochazoTuc on 29/02/2024 - 11:49

      It appears that I have a redraw account - could this be the reason for it? I've noticed that the available amount decreases slightly each month

      • larndis on 01/03/2024 - 07:45

        Redraw is a function of the loan account; you can have an offset account linked to a loan with redraw, it doesn't change how the offset account operates.

    • HeWhoKnows on 01/03/2024 - 22:40

      OP didnt specify how much they placed into thier offset account.
      If its only $2,000 or $3,000 the monthly interest saving will be hardly noticeable.($12.50)

      Also Not all offset accounts are the same !

      Some are 100% offset (preferred) whilst others only offset the interest earnt at a minimal savings rate

  • star-ggg on 29/02/2024 - 11:34
    +1

    Do you actually have an offset account? That facility is not automatically given to all loans. The offset amount will reduce the Interest payable each month but the Principal repayment will remain the same (assuming you are on P&I).

    • CochazoTuc on 29/02/2024 - 11:48

      It appears that I have a redraw account - could this be the reason for it? I've noticed that the available amount decreases slightly each month

      • star-ggg on 29/02/2024 - 12:46

        Redraw is a different mechanism. Speak to your bank about your options and facilities. The available amount decreases eachonth because you are paying off the principal in your repayments.

  • MrHyde on 29/02/2024 - 11:35
    +1

    The monthly repayments usually stay the same; but the monthly interest charge should be lower depending on how much money is in the offset account.

    What this means is that you will be paying more Principal every month; thereby being able to pay off your loan quicker.

    So, if you are not seeing the interest amount for the variable loan going down; something is not right somewhere.

  • Drakesy on 29/02/2024 - 11:35
    +5

    Honestly, unless your savings are increasing at ~9-10% p.a. put all of your money into your offset (provided you do have one).

  • JimB on 29/02/2024 - 11:52

    "given that in theory, a 6.04% return without having to pay tax on the earnings seems more beneficial than what I was getting from my other banks.

    However, I've started to grow concerned about how these offset savings are impacting my repayments. I've noticed that my monthly payment amount remains unchanged, as does the monthly interest charge (and this has been consistent for the past 3-4 months). This leads me to question - where exactly is the income generated by the offset account going?"

    I think you're getting confused.

    There is no 'income' or cashflow generated.

    However, you are being charged less interest.

    E.g.

    $1,000,000 loan
    6.04% interest.

    Nil Offset
    Interest is $60,400 p.a.

    with $500,000 in offset account
    Interest is $30,200 p.a.

    Repayments do not change, however you will pay off your loan faster.

    • iChaseYou on 29/02/2024 - 12:02
      +1

      This - any savings you have made to interest work towards reducing your principal loan amount.

    • freefall101 on 29/02/2024 - 12:36

      They also said the monthly interest charge is unchanged, it shouldn't be. Although it depends on how much they're expecting it to move, adding $1,000 a month would only shift the interest by $5 a month, there's more variation than that due to the number of days in the month on my loan.

      • JimB on 29/02/2024 - 13:31

        ‘ They also said the monthly interest charge is unchanged, it shouldn't be’

        What?

        • freefall101 on 29/02/2024 - 13:55

          Every month on the statement it says how much interest was incurred on the loan. This should go down (as to your point above) and OP said it hasn’t been.

          • JimB on 29/02/2024 - 14:04

            @freefall101: ok glad we're on the same page.

            I thought you/OP said the the monthly interest charge is unchanged.

  • redforever on 29/02/2024 - 12:06
    +1

    You mentioned the interests charged remain the same over the last few months. Has there been any increase in your variable rates ovwr this period? Your redraw account might have been offsetting these rate increases.

  • sumyungguy on 29/02/2024 - 12:31
    -1

    I commend your efforts to improve your financial literacy. If you want accurate product-specific advice, consult your financial services provider. If you prefer to spitball in these forums, just understand that the opinions expressed are those of the authors and may have no factual basis.

  • CochazoTuc on 29/02/2024 - 12:33

    I spoke with Ubank they would send me an XLS with their analysis. They perspective is that the interest has increased (i thought i have been in 6.04 for quite some time).

    • larndis on 01/03/2024 - 07:48

      Did they confirm that you have an offset account linked to your loan account?

    • larndis on 01/03/2024 - 07:51

      Or do you have a single loan account with a redraw facility? Have you been transferring your savings straight to your loan, or into a different account?

  • hasher22 on 29/02/2024 - 12:55
    +1

    Let's get the definitions of redraw facility vs offset account.

    Offset account
    Is a separate account from your mortgage. You can deposit money and withdraw money from it like any normal bank account.

    The offset will not reduce your monthly repayments but it will reduce the interest and time of your mortgage.

    Putting your money in the offset is usually the better choice to park your savings than in a savings account.

    Redraw facility:
    Is not a separate account and you deposit your money directly into the mortgage account but you can withdraw the money out of your mortgage, usually it's the excess you put in.

    Redraw facility does not lower your monthly repayments but does lower the interest and life of the mortgage.

    Pretty much it's the same same but different

    • HardQuiz on 29/02/2024 - 19:14

      Pretty much it's the same same but different

      How different? Annual fees?

      • hasher22 on 29/02/2024 - 19:19
        +1

        Really depends on the bank

        • How much you can withdraw daily, weekly, monthly in a redraw facility
        • Annual fees or monthly fees
        • some banks may charge you per withdrawal in a redraw facility such as $10 per withdraw
        • When you pay off your mortgage, your redraw account is also $0
        • Redraw facility is a 'feature' in a mortgage account
        • IMO, it's easier to read and manage an offset account and look at the deposit and withdrawls in one statement rather than in a redraw/mortgage statement.

        Personally, I rather have an offset rather than redraw

  • Shadowsfury on 29/02/2024 - 13:09
    +1

    https://figura.finance/calculators/repayments

    Have a play around with your actual numbers - seeing the changes might help with your understanding

  • Toph Beifong on 29/02/2024 - 23:20

    It appears that I have a redraw account - could this be the reason for it? I've noticed that the available amount decreases slightly each month

    That doesn't make sense. When you log into online banking and view your mortgage account. It should show you 2 balances:

    1) Balance (Usually prefaced by a "-" negative sign) which indicates how much you owe on the mortgage. This should be decreasing each month as you are making repayments into the mortgage account. The 6.04% interest rate will apply to this balance only.

    2) Available balance: Is a positive balance and indicates how much you have available to redraw and use. If you have been making repayments over and above the minimum monthly repayment set by your bank, this balance should be increasing each month.

  • TheMills on 01/03/2024 - 08:03
    +1

    Redraw will have unfavourable tax implications if you plan to take money out of redraw and convert your loan/property into investment account in the future.

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