Are There Downsides to Offset Accounts?

Offset accounts are a type of feature that’s offered by some lenders on certain home loan products. Depending on your financial goals and spending habits, an offset account can be used to reduce the amount of interest you’re charged on your home loan. Over the life of your loan, this could lead to significant savings. It could even help to shave the duration of your loan too. The aim is to stash as much cash in your offset account as possible so you can pay the least amount of interest.

While offset accounts can offer a range of benefits to borrowers, they don’t come without their own set of drawbacks. But before we get into some offset account disadvantages, here’s a quick refresher on offset accounts.

A quick overview of offset accounts

An offset account is a feature that’s often available with variable-rate home loans. Offset accounts work in a similar way to a regular transaction account, but they’re linked to your home loan. The balance in the offset account is offset against the outstanding balance of the mortgage before interest is calculated, so depending on how much money is in your offset account you could end up paying interest on a smaller portion of your home loan. If used properly, offset accounts could help you to reduce the amount of interest you pay on your loan and you could even be able to reduce the term of your loan.

Offset account disadvantages

While offset accounts can provide benefits, it’s also worth being aware of the potential drawbacks of this type of loan feature. Here are a few common disadvantages that come with offset accounts.

Higher account-keeping fees

Some banks charge fees to cover the maintenance or administration costs that come with running offset accounts. Before setting up a loan with an offset account, make sure you familiarise yourself with any fees that come with the account and factor them into your decision.

Higher interest rates

While we’re on the topic of higher costs, some home loans with offset accounts can have slightly higher interest rates compared to loans without this feature. While the interest savings from the offset account can offset this, it's essential to compare overall costs to make sure you’re getting the best possible deal.

Limited access

Just because your lender offers offset accounts doesn’t necessarily mean you’ll qualify for one straight off the bat. Depending on your loan-to-value ratio (LVR), you might only have access to certain mortgage features and facilities. A higher LVR generally indicates higher risk, so some lenders choose to limit access to certain features, like offset accounts. In this instance, you’ll need to work on paying off your mortgage to reduce your LVR to try and unlock access to additional loan features.

Limited effectiveness

For you to get the most out of your offset accounts, you often need to have a significant cash base saved in an offset account. If you’re not able to maintain a reasonable balance in your offset account, chances are the benefits will be limited. Plus, the higher interest rate on the loan could end up outweighing any potential savings.

Alternative options to offset accounts

If you don’t feel like an offset account is the right fit for you and your needs, you’ve got a couple of other options that can still help you get ahead with your home loan if you use them properly.

Redraw facilities

A redraw facility allows you to make additional repayments towards your mortgage above the minimum required payments. You can then redraw those extra payments at a later time if needed. This can be a flexible option, providing access to extra funds without the need for a separate savings account. With that said, some lenders impose fees or restrictions on the frequency and amount of redraws you can make, so be sure to get to know the T&Cs or you could potentially end up making a very expensive mistake.

Split loans

Split loans are a way to get the best out of both worlds. When you set up a split loan, you divide your mortgage into two portions. These two portions usually consist of a fixed-rate portion and a variable-rate portion. This can be a great way to take advantage of loan stability, courtesy of the fixed-rate portion, while also enjoying the flexibility that often comes with variable home loans. 

Even if just a portion of your home loan is variable, you’ll still usually have access to the features and facilities that are only available with variable mortgages. That means you can still make extra repayments or offset the interest on your home loan depending on the setup of your variable loan.

Although Unloan doesn’t currently offer offset accounts, that doesn’t mean you have to miss out on other amazing loan features. With our redraw facility, you can make additional repayments on your home loan above your minimum scheduled repayments and access them at any time without stumping up for any redraw fees. Learn more about our redraw facility today.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000. 

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.

* Other third-party fees may apply. Government charges may apply. Your other lender may charge an exit fee when refinancing.