Repay your home loan off sooner with the help of an off set account.


An offset account is a transaction account that is linked to your mortgage, with any balance held in your off set account being used to reduce your home loan balance and in turn the interest charges you are paying on your home loan.

By reducing the interest payments in your home loan, you accelerate the rate at which you are repaying the principal amount and so bring forward the date you will pay out your loan and be mortgage free. By repaying more of the principal amount you are also building up the equity you have in your home faster, which can be handy if you are thinking of using your property as an asset for further borrowing.

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How does the off set account work?

The offset account is a transaction account provided by your mortgage provider that is linked to your mortgage. To derive maximum benefit from the off set account you should aim to deposit all your income into the account and treat it as your primary transaction account, as your mortgage will be reduced by whatever the value of the balance is that is held in your off set account. The positive balance of your account is offset daily against the money you owe on your home loan, so the more days you can keep the off set account at a high balance the better.

Example of how an off set account works:

Here’s how an off set account might work on a mortgage of $600,000 taken on a 25 year term as a principal and interest loan with an interest rate of 4%.

On the above terms your monthly mortgage repayment is $3,167

If you now deposit $20,000 into your off set account, you will reduce your mortgage balance by this amount to $580,000, so now your monthly repayment is calculated on this new mortgage balance value and not the original mortgage value of $600,000, this sees your monthly repayment reduce by $106 to $3,061.

 

An example of the Interest savings that an off set account can deliver

Home Loan Off Set Account

Off set accounts work most effectively when you are disciplined about leaving any extra money you have each month, after covering bills and other expenses, in your off set account. Once the balance in the offset account builds to a sustainable level, you may choose to transfer these funds directly into the home loan, maintaining access to them via a redraw facility.

 

How to optimise the balance in your off set account

As any balance in your off set account is applied to your mortgage balance on a daily basis you should aim to have the balance in your off set account as high as you are able for as long as possible. One approach which can help achieve this is to use your credit card to cover your expenses, as opposed to withdrawing funds from your off set account.

 

Use your credit card for everyday purchases

The size of the balance you maintain in your off set account is what drives the savings, so every dollar you keep in this account the better. An approach that can help maintain a high balance for the maximum number of days each month is to use the interest-free days on your credit card. So rather than using the funds in your off set account to cover your everyday expenses and monthly bills use your credit card throughout the month for your purchases. By not accessing the funds in your off set account you maximize the balance in this account and optimize the savings you make. The one must stick to rule of this approach is to pay your credit card balance off in full by the due date each and every month, to avoid any credit card interest charges.

 

Savings Interest vs. Off set account

So what is the best use of that spare money you have, be it from a tax return, work bonus or maybe even a lotto win? Should you deposit it a savings account to earn interest or deposit in your off set account to save interest?

It’s great to see your money earn interest, but generally you will derive a better financial outcome by depositing your cash in your off set account as opposed to your savings account, here’s why:

The interest you save from funds held in your offset will generally be worth more to you than the interest you could earn with a savings account. Furthermore any interest you earn from your savings account is usually taxable, but anything you save through offset is tax free, as no interest is earned. By way of example if you have a savings account with 2.5% interest rate and say you are tax rate is 40% this is equivalent to roughly a 1.5% after tax. With the offset you get the benefit of offsetting 5% interest without any tax as you are not earning any interest, which is equivalent to saving of 5% tax-free.

 

Selecting the best offset account.

Ensure your offset account is a 100% offset account as this will deliver the full interest offset on any funds you keep in the account. So if your home loan interest rate is 5% then the funds in your offset account will offset the full 5% interest.

Double check that your lender links your offset account and mortgage from day one, it is the lenders responsibility to make the link but yours to chek it is in place correctly. Appraise any fees associated with using your off set account and check these fees are less than the savings you are making each month by using the account.

Offset accounts often feature a higher interest rate than a standard mortgage, to cover the costs of the flexibility. Check the how much extra interest you might have to pay and make sure it is worth it.