To offset or not to offset... that is the question

One of the biggest decisions you will need to make in regards to your home loan is to whether to choose a home loan with - or without - an offset account.

I am often asked, especially by first home buyers, whether it is worth having an offset account.

The answer lies with how you intend to manage your home loan repayments once your loan is set up.

With most banks, to have an offset account on a variable rate loan, you will be charged an annual fee of up to $395p.a. There are a couple of banks with a slightly lower annual fee and one which charges a monthly fee but the point is that this feature is something you pay for.

Therefore, if after number crunching with your broker, you work out that you will have little left over after making your home loan repayments and meeting your living expenses per pay, you may be less suited to having an offset account. You need to make sure that paying for an offset account is worth the cost.

However, if you will have some savings left over after settling on your new home or you feel that you will still have the capacity to save an amount each pay cycle or month, then you may be more suited to having a variable rate loan with an offset account.

The advantage of an offset account lies in it's ability to 'offset' the interest that is charged by the bank each month to your loan. The more you can have sitting in the offset account, even if your balance fluctuates, the greater the saving you can make with regards to interest.

The upshot is that you will pay off your loan faster than you would otherwise.

For those whose circumstances do not justify the cost of an offset account right now, all is not lost in regards to the potential to reduce the interest being charged to your loan. By transferring any available savings directly to your home loan account, you can achieve the same thing of reducing interest charged to your loan.

You can then redraw any lump sums you accumulate in your loan if the situation arises.

Redrawing funds from your home loan rather than utilising an offset account is a more manual process as it is reliant on you transferring funds to your home loan when available. An offset in comparison, benefits you immediately when any funds sit in the offset. This could be your pay or savings.

The reality is it really comes down to you and how you think you will manage your repayments after your home loan is up and running. This requires you to understand your expenses to know if you do indeed have the capacity to benefit from an offset account on your home loan.

Talk to your broker to work out if this is you.