Download the home loan offset calculator used in this article (Excel).
How does home loan offset work?
An offset account is a transaction account that can be linked to your home or investment loan. The credit balance of your transaction account is offset daily against your outstanding loan balance, reducing the interest payable on that loan. With a 100% offset account the balance of the offset account is taken away from the principal remaining on the loan for interest calculation.
Let’s have a look at an example. A customer with a $300,000 home loan over 25 years had an offset account linked to the home loan for the entire loan term with a constant balance of $50,000 in it, they would only pay interest on $250,000 for the entire loan term.
How much you can save?
So exactly how much you can save with an offset account? It depends on several things:
- Loan Amount
- Loan Term
- Loan Interest
- Loan Repayment Frequency
- Offset Account Balance
For most of us in order to estimate how much we can save, we need a calculator. Most of the lenders now provide an online mortgage offset calculator that we can use.
I think it is important to understand if those online offset calculators are accurate based on the assumptions they used. In the next section I will share the results from the top 10 home loan offset calculators suggested by Google if you search “home loan offset calculator” through it.
Top 10 home loan offset calculators
This screenshot below showed the top 10 offset calculators that had been reviewed. They includes online calculators from Westpac, ING Direct, ANZ, SunCorp, AFG (Australian Finance Group), Finder.com.au, CUA, AMP, Bankwest, and SmartSearchFinance.com.au. You can find the screenshots of all these 10 calculators at the end of this article.
The results from the top 10 offset calculators
When I reviewed the top 10 home loan offset calculators, I used the following assumptions:
- Loan Amount: $300,000
- Loan Term: 25 years
- Loan Interest: 6.00% per annum
- Loan Repayment Frequency: monthly which means you make 12 repayments
- Loan Type: principal and interest
- Offset Account Balance: $50,000
The table below shows the results from the top 10 home loan offset calculators:
As one can see, most of the calculators estimated that you would save around $126,500 to $126,700 over the entire loan term. AMP’s estimation is the highest at $129,505 while ING Direct and AFG estimated the savings were only about $71,272. In terms of loan pay-off time, the 10 calculators all estimated around 19 years and 6 months with 1 month variation. Hence, it seems that there is no issue with the pay off time.
However, the savings estimated by ING Direct and AFG seem way off from the others. Let’s see if they are wrong.
The right savings amount
In order to work our the savings from an offset account, we need to build a calculator in Excel to compare with and without offset account. Let’s see an example.
At the end the first month, you will need to pay the scheduled Monthly Repayment of $1,932.90. This is calculated by using Excel PMT function:
Monthly Repayment=PMT(Loan Interest/12, Loan Term*12,-Loan Amount)=PMT(6%/12, 25*12, -300,000)=$1,932.90
Out of this $1,932.90 repayment, $432.90 is the principal payment and it is calculated by using Excel PPMT function:
PPMT(Loan Interest/12,1,Loan Term*12,-Loan Amount)=PPMT(6%/12,1,25*12,-300,000)=$432.90
However, since there is an offset account, the interest you pay will be reduced by a amount calculated using this formula:
Offset Account Balance*Loan Interest/12=50,000*6%/12=$250.
In other words, this $250 will become principal repayment as you don’t need to pay this $250 loan interest. Hence at the end of 1st month you actually pay back $682.90 principal instead of the scheduled $432.90.
If we continue this calculation process, we will be able to find our when the loan will be paid off and how much we can save on interests.
I have built a simple home loan offset calculator in Excel based on the calculation process described above. You can download the calculator here. Below is the result from this free calculator.
Based on the calculator I built, you can save $126,657.31 interests and the loan will be paid off at the end of 19 years 7 months.
It suggests that the online calculators from the following lenders are more accurate:
The worst online home loan offset calculators are those from:
- ING Direct
- AFG (Australian Finance Group)
Screenshots of the top 10 online home loan offset calculators
AFG (Australian Finance Group)