Offset loan (finance)
An offset loan is a type of lending arrangement, usually for a mortgage, in which a borrower also maintains a savings account with the lender. Instead of receiving interest on the savings account, the interest payment due on the loan is calculated only on the net balance of the loan less the savings account. The regular payment is calculated on the full amount of the loan, however, so making regular payments will pay off the loan faster than a standard loan with the same interest rate, amount, and periodic payment.
Lenders usually charge a higher interest rate on offset loans than other types of loans. This makes offset loans only a good idea for borrowers that normally have large cash balances. If the cash to be used to offset is permanently available to pay down the mortgage and not needed for emergency spending, borrowers are normally better off pre-paying a more typical mortgage.
A customer with a $150,000 home loan over 30 years would pay approximately $167,190 in interest. If the customer had an offset account linked to the home loan for the entire loan term with a constant balance of $10,000 in it, they would pay the loan off in 26 years and 4 months and pay just approximately $127,553 in interest. This represents a saving of three years and eight months and approximately $38,636.95 in interest.[1]
Many offset loans are also flexible in their periodic payment amounts, allowing for overpayment, or underpayment if prior overpayment has been made. This makes them more attractive to some of the population likely to use them (those with irregular income), but is not a key defining feature of the loan.[2]
References
"Offsets are no panacea". Telegraph.co.uk. 2005-08-18. Retrieved 2007-02-06.
Thornhill, Jo (2005-10-31). "Offset mortgages: hit or miss?". thisismoney.co.uk. Retrieved 2007-02-06.