How Your Offset Account is Crucial as Rates Rise
With interest rates having been lifted and more rises expected over the course of the year it is imperative that you have all your loan products working hard for you and your finances.
One of the most effective tools in your financial arsenal is the offset account. If you have one, hopefully you are using it to your best advantage, but if you don’t have one, it might be worthwhile adding one to your financial toolbelt.
But, what are they, how do they work and how can they help save you money?
What is an offset account?
An offset account operates like a normal transactional account, the difference being is that it’s linked to a home or investment loan and the balance “offsets” the loan balance. Therefore, you are charged the interest.
For instance, if you owe $400,000 on your home loan and have $20,000 sitting in your offset, the bank calculates your interest charge based off a loan amount of $380,000. Therefore, an offset account has the potential to aid you in paying your home loan down more efficiently.
How much can I save with an offset account?
Assuming you use the offset account effectively, the potential savings can be significant. Using the above example, over the course of a 30-year loan term at a conservative interest rate of 3.5% you can expect to have your loan paid off over a year and a half years earlier. In addition, if you maintain a balance of $20,000 in your account, you can save yourself around $35,000 in interest charges.
Of course, the more you have sitting in your offset, the quicker the loan is potentially going to be repaid and greater interest charges you are obliged to pay.
Are my repayments effected?
This is key. Your repayments should stay the same, but the interest component of the repayment will be lower the more you have sitting in the offset. The reduced interest charge means that more will be coming off the principal and therefore the overall loan amount.
The offset account is therefore an excellent albeit passive way to have your loan chip away efficiently without really having to actively do anything except ensuring you have as many funds as possible in it.
How many offsets accounts can I have?
Each lender has their own unique policy regarding the number of offsets available but there are a growing number of banks offering the ability to have multiple accounts. This option is great for those who like to divide their savings for different purposes, such as a holiday account, children’s’ savings or bills.
If you operate your finances with several different transactional accounts but have a lender that only offers one offset, investigating a bank which allows multiple offsets could prove extremely cost effective. This alone can prove a compelling reason to change your mortgage lender.
Do all types of loans come with an offset account?
Not all loan products come with an offset account provision. Generally speaking, the “no frills” or basic loan products do not include offset as well as most fixed rate loans. However, some fixed products may include a “partial” offset, meaning a portion of the account balance will offset the interest.
I have very little in savings, can an offset still be useful?
Absolutely. Savvy offset account users opt to have their salaries paid into the account and let it sit there for as long as possible, using their credit card to pay for all their living expenses for the month. Prior to the end of the month, they will then pay off the credit card to avoid the interest charges incurred. As interest is calculated daily, letting as much money as possible hang out in offset means reaping the benefits it offers.
There is only so much a mortgage holder can do to mitigate the interest rate rise itself, but by having the optimum financial products in your portfolio your can certainly ensure you are not paying more than you must. If you need some guidance on how to use your offset account or anything else relating to your home loan contact one of the Blackburne Mortgage Broking team.