As mortgage & finance specialist, we get asked loads of questions. One often asked question in the mortgage broking business is ‘how to save money’ MORE MONEY. There are literally various ways to save money i.e. better rates, low mortgage insurance, right product & loan structures and many more.
One of the most powerful strategy is OFFSET ACCOUNT. So, lets look at ‘what is a mortgage offset account and how can it benefit me?’
Offset accounts may save you thousands of dollar, lower the amount of time it takes you to pay off your home loan.
So, how do offset accounts work?
An offset account is essentially a savings account that’s attached to your home loan. It has all the usual benefits of a regular savings account, allowing you to make deposits and withdrawals, plus it pays you interest.
However, unlike a normal savings account, a mortgage offset account pays interest at the same rate as your home loan. This is usually more than a regular savings account and it’s where you can make huge savings on your mortgage.
The money in your mortgage offset account is deducted from your loan balance daily. For example, if you have a $300,000 loan and $50,000 in your offset account, you will only be charged interest against $250,000. This can significantlydecrease the amount of interest you need to pay, so your monthly mortgage repayments reduce the loan amount faster.
Just by depositing your salary into it each month and using it like a regular account to make payments, you can save thousands over the life of your loan.
Another benefit of mortgage offset accounts is that they’re completely tax free.
What to look for in an offset account
When we help you look for a loan with an offset account, we consider the accounts that give you as much flexibility as possible:
- No balance limit. The more you accumulate in your account, the bigger the benefits in terms of savings on your home loan.
- 100% of your balance is offset against your loan, calculated daily. Some accounts only calculate on the lowest monthly balance or the average monthly balance, so it’s important to get an account that calculates savings when the balance is also high.
How does it help to cut down on the length of my loan?
When you have a mortgage offset account, the balance is deducted from the loan so that the amount of interest you pay each month is less. If your mortgage repayment stays the same, you are therefore paying more off the capital of the loan, reducing it quicker.
Here’s an example (calculated on a 5% interest rate).
Let’s just say you have a home loan of $300,000 over 30 years. Without an offset account, you would pay $279,767 in interest over the life of your loan.
If you had the same home loan with a mortgage offset account containing a balance of $20,000 for the life of the loan, you would have saved $34,169 in interest. What’s more, the surplus money coming off your home loan balance would pay the loan off in 26 years and 11 months. Obviously, the more money you have in your offset account, the more you will save and the quicker you will pay off your loan and, your mortgage offset account will give you the additional flexibility of having money on hand if you need it.
How do I find the right loan with the right offset account?
There are over 33 lenders and literally hundreds of loan products on the market, personalized to a variety of different uses. With access to a wide variety of lenders, we can pick and choose. We do all the leg work to find you the right product for your particular needs and personal financial circumstances.
Mortgage & Finance Specialist, JP