You’ve most likely heard the term Offset Home Loan Account, you may even have one yourself, happy in the knowledge that you’re doing something to pay your mortgage off sooner.
It’s actually one of the most powerful tools you have, allowing you to save thousands – even hundreds of thousands – of dollars over the life of your mortgage.
But – are you REALLY taking advantage of that Offset Account?
What is an offset home loan account?
An offset account is a transaction account that is linked to your home loan. The credit balance of your transaction account is ‘offset’ daily against the outstanding balance of your loan, thus reducing the interest payable on that loan. Over time, this can really add up to large savings and reduce the time it takes to pay off your loan.
If you put as much money as you can into your transactional account that’s linked to your mortgage, you can save interest each day that your money is there. Your mortgage is calculated on the full amount of your remaining debt MINUS any offset funds you have accumulated. In other words, your mortgage will no longer be calculated on your full debt.
Here’s an example: say you have a home loan balance of $200,000 and have $10,000 in your offset account. So, you’ll only pay interest on $190,000 of your home loan.
In short, an offset account offers you more flexibility. You’ll be paying off your mortgage quicker, but still have access to your funds if you need them.
What to look for
There are both full (100%) and partial offset accounts. With 100% offset accounts, interest rates are earned and paid at the same time, while a partial offset account is where the interest earned is only a portion of the rate paid on the home loan.
What you can do
There are a few steps you can take to make sure you get the most out of your account. Have your wages deposited in your transaction account, so the money you earn is immediately helping to reduce the interest you pay on your home loan.
Even though you will most likely spend some of that money over the month it’s still of use. Another example – let’s say that you get paid on the 15th of every month but your mortgage repayment comes on the 28th. Even though there’s only 13 days between them, you’ll be saving the difference in interest on the amount in your account for that period of time, which can eventually add up to thousands.
Any savings or lump sum payments you receive should go directly into this account. Again, you’ll still have access to the money if you need it, but the longer it stays in the account, the more interest is paid off.
Is an offset account for you?
An offset account is useful if you, like many people, can’t pay lump-sum repayments into your loan. You may be saving up for something specific – like renovations, holiday or school funding. You can use that money wisely before you cash it out for the reason you’re saving it.
However, it’s wise to make sure there’s still some money left in the account, as fees can rise once your account sinks past a certain amount. An offset account will really only work if you have a decent amount of savings. If you only have a few thousand dollars on a regular basis, your savings won’t be significant.