What is an Offset Account Anyway?
When it comes to the dizzying array of terminology and features surrounding home loans and mortgages, one account type which often has a starring role in many lenders products and packages is the Offset Account.
Most existing and potential mortgage holders are aware that the offset account exists and that they are a handy tool to have in your financial arsenal but you’d be surprised to learn that many either don’t fully understand how they work or rarely use them to their full capacity. So, let’s see about changing that.
Offset Accounts 101
An offset account operates like a standard transactional account in so much as you make deposits, withdrawals and the like as you would with any other savings account, the difference being is that it is linked to you home loan.
Funds you have on your offset account “offset” against the balance in your home loan account, reducing the interest calculated on the loan. So if you have a home loan of $300,000 and $20,000 in your offset account, you will only be charged interest on a loan of $280,000. So, the more you keep in your offset each day, the less interest you will pay.
Does that mean your repayments will be less?
No, your scheduled repayments will stay the same even though you are paying less interest. However the good news is that as you are making the same repayments but the interest charge is reduced, you will be paying more off the principal loan balance thus reducing your debt quicker.
How to use your offset account smartly
There are a few key things to consider if you wish to offset like a champ:
- Keep as much money in your account as possible. Sounds obvious but its crucial to be mindful to keep the balance healthy. If you run with more than one transactional account manage your funds in a way to maintain the highest possible balance in your offset.
- Does your lender allow multiple offsets? Not all do, so check with your broker to see if your current bank has this provision, or perhaps look at a lender that does provide multiple offsets if having several accounts is a necessity.
- Get your salary paid into your offset. As interest is calculated daily you want to make the most of every dollar so get you salary working for you as soon as it lands in your account.
- Use your credit card to pay for your living expenses. Many mortgage holders choose to leave their salaries in their accounts for as long as possible and use their credit card for day to day expenses. This is a savvy strategy, however, it does mean you will have to ensure the card balance is cleared by the end of the month before the interest charges kick in, otherwise it will defeat the purpose. Just be mindful about what works best for you.
Do all home loans come with offset accounts?
Not all loan products allow the provision of an offset account. Usually basic, low rate home loans that generally suit the first home buyer market, do not come with offset accounts. But as they often come with a low interest rate, are cost effective in that way.
You will also find that fixed rate loans will usually not offer a 100% offset provision though there are many lenders that will allow partial offset against a fixed loan. In this instance its common for mortgage holders to keep a portion of their loan variable to enjoy the offset capability when they choose to lock in a low fixed rate.
Having an offset account and using it to its fullest capability is one of the simplest and most effective ways to pay down your home loan quicker and the good thing is that most products and packages will have the feature available. To ensure that you are making the most of your offset make sure you speak to one of our brokers who will be able to give you some useful tips to manage you money and get your loan paid down fast. Or if you haven’t got an offset and think it’s time to get on board, contact us today.