An offset account linked to your mortgage can be a great way to reduce the amount of time and interest you pay on your home loan.
An offset account works in the same manner as your everyday banking account with one crucial difference – the balance is offset daily against money you owe on your loan, which reduces the amount of interest you pay.
A reduction in interest means you can pay off your loan quicker. For example, if you have $10,000 in an offset account and you have a $300,000 home loan, you will only pay interest on $290,000. Using this calculator you can see if the interest rate is at 5%, you could save $18,357.69 in interest and cut 1 year and 8 months off the length of a 30 year loan.
Because the money in your account is offset daily against your loan balance, the longer you have money in your account, the more you will save on interest.
There are a few questions that are often asked in relation to offset accounts.
Why not save the money in a high interest account instead?
In almost every case, you will never earn more interest in a savings account than what you are paying in interest on your home loan. Interest earned in a savings account also needs to be declared to the tax office, and tax must be paid on it. Your money will be working much harder for you in an offset account.
Why not put the money straight on the mortgage?
There are benefits to keeping money in your offset account rather than putting it straight on the mortgage. Funds in an offset account can be used like your everyday account. If you have an emergency, or you may be saving for a holiday, it is easy to withdraw funds as necessary. If you put it all on the mortgage, then find you need the money down the track, you may be hit with redraw fees or minimum redraw amounts.
- Using a credit card in conjunction with an offset account is a great way to maximise your return. Use a fee-free credit card for your everyday living expenses, and pay this off in full on the due date. This way, you have no additional fees to pay, and your money sits in your offset account for longer, saving you more in interest.
- If you are afraid you may be undisciplined, try looking for a bank that offers multiple offset accounts. You can then divide your funds into a living expenses account, savings account and so on, while still benefiting from a mortgage offset.
- Look for accounts that offer 100% offset to take full advantage of offset accounts.
- Have your pay deposited directly into an offset account. Even if it sits there for a single day, it will still save you interest!
Having a decent amount of savings in your offset account can cut years and thousands of dollars from your home loan. It also offers comfort in the knowledge that you can access these funds at any time, with no issue.
Always beware of extra transaction charges that may surround offset accounts though. It is best you do your research and speak directly to your bank regarding these accounts being used to pay your mortgage faster.
*Hotondo Homes are not financial experts. You should always seek independent legal advice when looking to reduce the amount of your mortgage with an offset account.