Investment Property Financing- Intuitive Finance

What is an offset account?

Offset accounts are like everyday savings accounts, and you can access them any time. But there’s one key difference – offset accounts are linked to your home loan. So, the funds in this account will balance out your mortgage so that you pay less interest over the life of your loan.

Home owners can choose from a 100 per cent offset account or a partial, or 40 per cent to 50 per cent, one. They can even link several offset accounts to their home loan. But these accounts are generally only available for variable, and not fixed, loans, and you may be charged extra fees for them.

How an offset account reduces interest

You will only be charged interest on the financial difference between your offset account and your home loan balance. So, if you have $50,000 in your offset account and a $500,000 home loan balance, you will be charged interest on $450,000 (your home loan balance minus your offset account sum) – rather than $500,000.

Benefits of offset accounts

The biggest benefit to offset accounts are the savings from paying less interest. This lesser interest will also equal a shorter home loan lifespan. You can enjoy extra tax breaks as well.

Interest savings

Put simply, the more cash you have in your offset account, the better – or lower – your interest rates will be. So, I recommend using your offset account for major savings, your salary, and other large cash deposits such as tax refunds.

Tax considerations

The interest you earn on an everyday savings account is usually considered income – so it’s taxed. But offset account interest is not considered income so therefore, it won’t be taxed, and you will profit from more savings.

What is a split loan?

Also known as partially-fixed interest loans or combination loan structures, split loans are a compromise between a fixed and variable loan. So, they offer both flexibility and stability, and best of all, they can save you money.

How split loans work

Split loans are one loan with two loan portions: fixed and variable, and you’re allowed to choose how to divide these portions. Lenders usually prefer a 50:50 split but whether you choose this split, or another one, is up to you based on your financial situation.

If you’re not sure how to split your loan, ask a specialist mortgage broker to help you.

Pros and cons of split loans

Split loans always offer at least some interest rate security and overall flexibility – no matter what the larger economic market is undergoing.

But you’ll also have to monitor two different loan rules and regulations, as well as interest rates. Split loans also sometimes have higher fees and costs than either fixed rate or variable ones.

Fixed vs variable components

The two portions of a split loan will be subject to fixed or variable terms and conditions. So, for a 20 per cent fixed and 80 per cent variable, split loan, 20 per cent of the split loan won’t be dependent on interest rate changes – either hikes or declines. You can also enjoy secure risk management.

But, 80 per cent of your loan will be susceptible to interest rate changes. This part of the loan will also usually offer offset accounts and redraw facilities.

Offset accounts vs split loans: which is better?

Both options can save you money and lessen your loan’s lifespan. But both also include benefits and disadvantages.

So, you should always talk to a mortgage broker before deciding which option suits you and your financial situation best.

Comparing costs and benefits

Offset accounts have great tax breaks.

But they’re only available with variable, not fixed, loans. They may require extra fees. And they need to consistently have enough funds to make them worthwhile.

Split loans’ variable section can feature an offset account. But how much of these account’s costs and benefits you can enjoy will depend on how you divide your split loan.

Factors to consider based on your situation

For offset accounts, do you already have a large amount of savings? Are you confident you can save more, and always in the long term? Are you good at keeping a regular eye on your finances?

For split loans, are you confident you can monitor two different loans – including different interest rates – simultaneously? Are you good at keeping a regular eye on your finances as well?

When to use offset accounts or split loans

How to choose between these possibilities is ultimately up to you and your finance provided based on your personal situation.

First-home buyers

Our mortgage brokers would generally advise you to choose a split loan with a high fixed portion, or simply a fixed rate loan full stop. This will ensure you have some stability and risk management at this often-stressful time.

Refinancers and investors

Refinancers, I recommend you check both split loans and off-set account options with your potential new lender, to see what they can offer you. Give them – and yourself – several split loan divides to consider as well.

Investors, if you’re positive you can handle two loans under the one banner – including one with an offset account – choose a split loan with a high variable portion.

Final thoughts

Regardless of whether you choose either, both or none, every home owner should investigate offset accounts and split loans. These options have plenty of great benefits, not the least of which are excellent savings. But both also have disadvantages as well.

Choosing the right loan structure

Remember: you should be confident you’ve chosen the right split loan divide or offset account option for you and your financial situation before ticking the box that best suits you.

After all, there is no one answer that will suit everybody.

Talk to a mortgage broker

A mortgage broker can help you cut through the ins and outs of offset accounts and split loans. They’ll also know your financial situation – and that of the overall property and economic market – back to front.

As a result, they can give you excellent advice on a potential new offset or split loan. So, if you’ve got questions or concerns, just reach out to us.

Want to maximise savings on your mortgage? Contact us today to explore if an offset or split loan is the best fit for your goals.

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Andrew Mirams

Andrew Mirams is the Founder and Managing Director of Intuitive Finance, a highly respected and multi-award winning Mortgage Brokerage dealing with clients all over Australia and around the world. Andrew has over 30 year’s experience in the finance industry and has assisted clients to secure over $2 Billion in mortgage lending over his time. Intuitive Finance deals with all aspects of lending from helping first homebuyers, someone wanting to upgrade their home or starting out and experienced investors looking to secure that next investment property, we can assist with all those requirements. We also specialise in working with self-employed clients and getting them the best outcomes, along with Commercial and Asset finance solutions. Intuitive Finance is highly regarded in the industry and has been recognised as a national winner of the MFAA customer service award and also one of the finance industry’s top mortgage employers. Our brokers also feature regularly in the Top 100 mortgage brokers list in Australia.

Offset accounts and split loans: How they work and when they save you money