An offset account can see you pay your mortgage off quicker and save thousands on interest payments. Before applying for a home loan it’s important to consider what your needs may be for the life of the loan as well as analysing your money habits.
What is an offset account?
Your offset account is linked to your home loan, therefore the balance in your offset account “offsets” daily against your home loan of which interest is calculated on a daily basis. The benefit lies in keeping your offset account as high as possible to save interest.
Although you will not earn interest on your money in an offset account it’s important to consider that you are saving interest as the rate of interest on your mortgage is likely to be more than your savings account. The added benefit is that if you were to put your money in a savings account rather than on offset account, the interest you accrue would be taxable at your marginal tax rate.
For example, if you have $20,000 in your offset account and $500,000 owing on your mortgage, the interest on your home loan is calculated on $480,000 rather than $500,000. Your housing loan repayments remain the same but you are paying less interest.
This can further be manipulated if you pay your salary into your offset account, reducing the interest on your home loan immediately. You could use your credit card to cover monthly spending so you maintain the maximum amount in your offset account. At the end of the month make sure you are disciplined and pay off your credit card in full rather than incurring interest charges. By leaving the funds in your offset account as long as possible before paying bills and living expenses you reduce the amount of interest you pay on your mortgage and this long term strategy could save you a considerable amount of interest as well as paying your home loan off sooner.
It’s crucial to make sure any annual fees are worth the luxury. If you strategically use an offset account for your savings and have a disciplined approach to managing your finances, this approach could save you thousands. In short, use an offset account wisely!
An offset account can be a productive and flexible vehicle to save on interest and pay off your home faster. Before deciding it’s right for you, speak to one of our mortgage brokers; they can provide a simple and transparent evaluation and can provide further alternatives considering your personal circumstances.