Getting the right home loan can make it easier to reduce costs and manage your repayments better. A mortgage offset account is one such feature that could help you save thousands of dollars in interest each year, making it possible to own your home sooner.
What is an offset account?
A mortgage offset account is like a transaction account linked to your home loan. While calculating the interest on your mortgage, the money in your offset account is ‘offset’ against your outstanding loan balance, bringing down the interest charged on it.
How does an offset account work?
Unlike a savings account, where you generally earn interest on your account balance, the money in your offset account works to reduce the interest you pay on your home loan.
Imagine that you have $500,000 outstanding on your home loan, and there’s $20,000 in your offset account. In this case, you’ll only be charged interest on the difference, that is, $480,000. Therefore, the more money you keep in your offset account, the less interest you’ll be charged on your mortgage.
However, using an offset account isn’t going to change the size of your monthly repayments. Instead, a larger part of your monthly repayment will be applied towards paying off the principal. This will help you repay your loan faster and save money on interest charges.
One option to help maximise your offset account balance is having your salary deposited directly into your offset account. Since the interest on your home loan is calculated daily, the longer you keep your money in an offset account, the more money you can save. If you use a credit card to pay for your daily expenses, it may help you to keep money in your offset account for longer. However, you need to be extremely cautious and disciplined while using this strategy. Using a credit card could lead to overspending, which can strain your budget. It’s also important to be careful about paying your credit card bill in full and on time every month to avoid any late payment charges.
What are the potential benefits of an offset account?
Paying less interest on your home loan is the most obvious benefit of keeping your money in an offset account. Each cent you put in a 100% offset account reduces the amount of interest you are charged on your mortgage, saving you money and helping you repay your home loan faster.
Putting your money in an offset account can help you get more bang for your buck. Considering that your home loan interest rate is likely to be higher than the rate of interest on a savings account, you can save more money in interest charges by keeping your funds in an offset account than what you would have earned from a savings account.
Furthermore, the interest you earn on a savings account is taxable. However, you are not required to pay any tax on the interest savings you make using an offset account.
Are there any drawbacks of an offset mortgage?
Even though a mortgage offset account offers several benefits, it may not be a suitable option for everyone.
- You may be required to pay a higher interest rate on a mortgage with an offset account than what you’ll pay on a basic home loan without it.
- Some lenders may charge an additional account-keeping fee for a loan with an offset account.
- While you are allowed to make unlimited withdrawals from your offset account, there might be some charges to pay each time you withdraw money.
Is a mortgage offset account right for me?
Whether an offset account is right for you will depend on several factors, especially the interest rate and fees you are likely to pay compared to the savings you expect to make.
It’s also worth checking whether your lender is offering you a 100% offset facility or a partial offset facility. In a partial offset facility, only a percentage of your savings will be used to reduce your home loan interest. It’s generally advisable to opt for a 100% offset facility to get the maximum possible benefit.
Another option you may consider is using your savings to make additional repayments on your home loan. However, your money may not be easily accessible if you use it towards repaying your home loan. You’ll need to make an application to redraw the money (if you already have a redraw facility), and there may be some charges to access the money. But if you think you are likely to overspend, you may be better off locking your savings into your home loan rather than keeping them easily accessible in an offset account.
