Offset Accounts or Term Deposit/Savings Accounts?

If you have a mortgage, you’ve no doubt dreamt of a way you could pay it off sooner and with less interest. Your dreams might be heading straight to lottery wins, but there’s a far more accessible way. 

You might be familiar with the term “offset account”, or perhaps you’re just looking into it for the first time. Having an offset account may help you to pay off your home loan faster and save you thousands of dollars in repayments. So, how exactly do they work? Are they worth it? Shouldn’t you just put any extra cash you have into a savings account? Let’s take a look at the benefits of each. 

What is an offset account? 

Overview. 

An offset account is an account linked to your home loan. Whatever lucky bank you’ve chosen to do your mortgage through, your offset account will be with them also. It operates like a transaction or savings account and offsets its balance against the balance of your home loan. So, you'll only be charged interest on the difference. 

Benefits. 

Offset accounts save you interest, rather than earn it. All you need to do is deposit your regular income and any savings you have into your offset account. Then, you just use it like your normal everyday account, but you could pay off your home loan ahead of its term, saving thousands of dollars at the same time. 

Let's say your home loan interest rate is 2.75% and you've got $50,000 in savings. In an offset account, that money is saving you $1,375 per year. If you had that same amount in a high-interest account, earning 1.35%, you'd only gain $675 per year. 

Full disclosure — these accounts sometimes come with higher costs, so it’s important to ask your bank for specifics and manage it carefully to get out ahead in the long run. 

What is a savings account? 

Overview. 

A savings account holds any money that you don’t need or want to spend right away. This can be used as a safety net for emergencies (such as unexpected medical bills, car expenses), or just long-term goals like a holiday or a fancy new TV. 

Benefits. 

Your money stays safe and earns interest on your balance, so you can earn a small income passively just by practising regular saving. They help you stay financially secure by ensuring there is a “cushion fund” available when you need it, and assist with reaching long-term financial goals. 

They won’t do anything for your home loan though… 

What is a term deposit? 

Overview. 

With a term deposit, you lock away an amount of money for an agreed length of time (the “term”). Your money is inaccessible until the allotted time is up. 

Benefits. 

No, you can’t access your own money. But, in return, you’ll get a guaranteed rate of interest for the term you select. You’ll have peace of mind and know exactly what the return on your money will be. Plus, should interest rates move lower, you’ll still be locked in at the same rate of interest. It’s also a good way to engage in “forced” saving, and particularly helpful for spenders and impulse buyers who struggle to save. Again, a term deposit won’t affect your home loan. 

Need help deciding which account type is right for you? 

For some, the answer is obvious, for others, more thought needs to be considered. If you would like to talk to someone about your account needs and mortgage, we can put you in touch with Daniel Morcombe. Daniel is a trusted Financial Planner that Ascent Accountants is associated with — to chat with him, contact us to get his details.