First Home Buyer's Guide to Variable Rates & Offset Accounts

Understanding Variable Rate Home Loans

When you apply for a home loan as a first home buyer, one of the most important decisions you'll make is choosing between a fixed interest rate and a variable interest rate. Variable rate loans offer flexibility that can work in your favour when interest rates decrease, and they typically come with features that fixed rate loans don't offer.

With a variable interest rate, your repayments can change when the lender adjusts their rates in response to market conditions and Reserve Bank decisions. This means your repayments could go down when rates fall, but they could also increase when rates rise. Understanding this relationship is crucial when you're working out your first home buyer budget.

Variable rate loans often provide access to additional features such as offset accounts, redraw facilities, and the ability to make extra repayments without penalty. These features can help you pay off your first home loan faster and reduce the total interest you'll pay over the life of your loan.

How Offset Accounts Work

An offset account is a transaction account linked to your home loan that can significantly reduce the interest you pay. The balance in your offset account is "offset" against your loan balance, meaning you only pay interest on the difference.

For example, if you have a home loan of $400,000 and $20,000 sitting in your offset account, you'll only pay interest on $380,000. Your minimum repayment stays the same, but more of each payment goes toward reducing your principal rather than paying interest.

Offset accounts function like regular transaction accounts. You can deposit your salary, pay bills, and withdraw money as needed. The key advantage is that every dollar in your offset account works to reduce your interest charges, potentially saving you thousands of dollars over the life of your loan.

Variable Rate Loans vs Fixed Interest Rates

When comparing home loan options, it's important to understand how variable rate loans differ from fixed interest rate loans. Fixed rate loans lock in your interest rate for a set period, typically between one and five years. This provides certainty with your repayments but usually comes with restrictions on extra repayments and rarely includes offset account access.

Variable rate loans offer flexibility to take advantage of interest rate discounts and typically allow unlimited extra repayments. If you receive a bonus at work, a tax refund, or inheritance, you can put this money toward your loan without penalty. This flexibility can be particularly valuable for first home buyers who expect their income to increase over time.

Some borrowers choose a split loan structure, where part of their loan is on a fixed interest rate and part is variable. This approach provides some repayment certainty while still offering access to features like offset accounts on the variable portion.

Benefits of Offset Accounts for First Home Buyers

For first home buyers in Playford, offset accounts offer several practical benefits that can accelerate your path to owning your home outright. The primary advantage is the interest savings. Because you're only charged interest on your loan balance minus your offset account balance, you could save substantial amounts over the loan term.

Offset accounts also provide easy access to your savings. Unlike making extra repayments directly onto your loan, money in your offset account remains accessible for emergencies or opportunities. This liquidity is particularly valuable when you're settling into homeownership and may face unexpected expenses like repairs or renovations.

Another benefit is tax efficiency. The interest savings from an offset account aren't considered income, so you don't pay tax on them. This is different from earning interest in a regular savings account, where you'd need to declare the interest as income on your tax return.

Offset Accounts vs Redraw Facilities

While both offset accounts and redraw facilities can help you save on interest, they work differently and have distinct advantages. A redraw facility allows you to access extra repayments you've made on your loan. When you make additional payments above your minimum, you can "redraw" these funds if needed.

However, there are important differences to consider. Redraw facilities may have limits on how much you can access, waiting periods for processing, or fees for each redraw. Some lenders may also restrict redraw access if you're behind on repayments or in financial difficulty.

Offset accounts provide immediate access to your money through regular banking channels like ATMs, EFTPOS, and online transfers. You don't need lender approval to access your funds, making them more flexible for managing your day-to-day finances while still reducing your interest costs.

Setting Up Your First Home Loan with an Offset Account

When you're ready to apply for a home loan with an offset account, there are several factors to consider during your first home loan application. Not all variable rate loans come with offset accounts, and some lenders may charge higher interest rates for loans with this feature.

You'll need to compare the interest rate difference between loans with and without offset accounts. Calculate whether the interest savings from the offset account will exceed any additional costs. In most cases, if you can maintain a reasonable balance in your offset account, the savings will outweigh any rate premium.

Consider your financial habits when deciding if an offset account is right for you. If you typically maintain a healthy bank balance and can deposit your salary into the offset account, you'll maximise the benefits. However, if you usually run a low balance, you might be better off with a lower interest rate loan without an offset account.

First Home Buyer Support and Offset Accounts

Many first home buyers in Playford access government support schemes when buying their first home. These include first home buyer grants, first home buyer stamp duty concessions, and programs like the First Home Loan Deposit Scheme that allow you to purchase with a 5% deposit or 10% deposit without paying Lenders Mortgage Insurance (LMI).

The Regional First Home Buyer Guarantee may also be available for properties in certain areas. When you're using these schemes, you can still choose a variable rate loan with an offset account, provided the lender offers this combination and you meet their lending criteria.

Your first home buyer eligibility for various schemes won't be affected by choosing an offset account. These are simply features of your home loan structure, separate from the government support programs designed to help you enter the property market.

Maximising Your Offset Account Benefits

To get the most value from your offset account, deposit your salary and other regular income directly into the account. Even if this money is only there for a few days before you pay bills, you'll save on interest charges.

Consider using your offset account as your primary transaction account for all income and expenses. The higher your average daily balance, the more you'll save. Some first home buyers also use their offset account to save for holidays or large purchases, benefiting from interest savings while they accumulate funds.

Keep in mind that it's the daily balance that matters. Interest is calculated daily on your loan, so maintaining consistently higher balances will provide better results than occasionally depositing large amounts. This is where receiving your salary into the offset account makes a real difference.

Getting Pre-Approval and Professional Advice

Before you start seriously looking at properties, obtaining pre-approval for your home loan helps you understand your borrowing capacity and shows sellers you're a serious buyer. During the pre-approval process, discuss offset account options with your mortgage broker.

Working with a finance and mortgage broking business like Simple Lending can help you understand which lenders offer the most suitable offset account features for your situation. Different lenders have varying policies on offset accounts, including whether they offer 100% offset (where the full balance offsets your loan) or partial offset arrangements.

A mortgage broker can also help you understand other important aspects of your first home buyer checklist, including low deposit options, gift deposit rules, and whether features like the first home super saver scheme might benefit your situation. They'll compare home loan options across multiple lenders to find the right fit for your circumstances in Playford.

Making Your Decision

Choosing the right home loan structure is an important decision when buying your first home. Variable rate loans with offset accounts provide flexibility and potential interest savings that can significantly reduce the time it takes to pay off your loan.

Take time to understand how these features work and whether they align with your financial situation and goals. Consider factors like your expected income, spending habits, and how comfortable you are with the possibility of interest rate changes affecting your repayments.

Remember that first home buyers have access to various support programs including first home owner grants (FHOG) and stamp duty concessions. These benefits, combined with the right loan structure, can make homeownership more achievable and affordable over the long term.

Call one of our team at Simple Lending or book an appointment at a time that works for you. We'll help you understand your options, compare variable interest rate loans with offset accounts, and find a solution that supports your journey to homeownership in Playford.