No one really likes paying interest on their home loan. For most people, paying interest is a kind of necessary evil – a depressing reality that will ultimately help you achieve your goal (owning your own home).
So, when people hear that an offset account could help them pay less interest, they usually get excited. But what exactly is a home loan with offset account? Is it worth having a mortgage offset account? And how can you make the most of your home loan offset account?
This is offset account explained.
What is a Home Loan Offset Account?
A home loan offset account is an incredibly useful tool for homeowners. With an offset account connected to your mortgage, the balance in the account is used to reduce the amount of interest charged on the home loan. This makes an offset account a great way to save on interest and reduce the time taken to pay off the loan.
This type of account is particularly useful for those who have a regular flow of income, such as salary or investment income, as the balance in the account will be constantly changing. This means that the amount of interest charged on the home loan will be constantly adjusted, allowing for maximum savings. Additionally, an offset account allows for easy access to funds, with no penalty for early withdrawals. For those looking to reduce their home loan while still having access to funds, a home loan offset account is a great option.
How do offset accounts work?
How offset account works is that it pretty much operates just like an everyday bank account – you can have your salary deposited straight into the account, you can set up direct debits and you can use the funds to buy groceries, fuel, or your morning latte. But any money you have sitting in your home loan offset account will be used to “offset” the balance of your mortgage. In other words, when calculating how much interest you owe on your home loan, the lender will first deduct the total balance of your offset account. The figure remaining will then be used to determine your monthly interest.
So does offset account reduce monthly repayments? Yes — in fact, it is a great way to reduce your monthly loan repayments. An offset account effectively reduces the interest you are charged on the home loan, as the bank is no longer calculating interest on the full loan amount. This can result in a substantial decrease in your monthly home loan repayments, which can be extremely helpful if you are struggling to make ends meet.
How an offset account can benefit your home loan
An offset account can help you save money on your home loan in a variety of ways. Below are offset account benefits:
- reduce the amount of interest you pay on your loan
- help you pay off your loan faster
- reduce the amount of time it takes to pay off your home loan.
- help you save on taxes by allowing you to deduct the interest you pay on your offset account from your taxable income
- help you manage your cash flow, as the money you deposit in the account is immediately applied to your home loan balance
With these benefits, an offset account can be a great way to maximise your savings and make the most out of your home loan. However, keep in mind that there are also offset account disadvantages when used without a thorough evaluation of how exactly it can fit your needs. You can ask the following questions to determine if you need a home loan offset account:
- Am I willing to pay the potential extra fees associated with an offset account?
- Am I comfortable with the risk of not having access to my funds in an emergency or if interest rates change?
- Am I able to maintain a consistent balance in the offset account to make it worthwhile?
- How often will I be able to make withdrawals from the offset account?
- Will having an offset account impact my ability to make additional repayments on my mortgage?
- Is an offset account the best option for me, or are there other options that may better suit my needs, such as a redraw facility or a fixed-rate mortgage?
Is an offset account worth it?
To answer this question, you’d first need to assess the loan product on offer. Does it come with added fees? Is the interest rate competitive? You’d then need to calculate how much money you’ll be able to deposit in the offset account. With the right conditions, a mortgage offset account could substantially reduce the amount of interest you’ll need to pay over the life of your home loan.
For example, imagine you had a 30-year loan with a balance of $550,000 and an interest rate of 4.5%. If you were to deposit $30,000 in your offset account, you could potentially save yourself $77,497 and pay off your loan over 2 years earlier than planned!
What is the maximum amount in offset account?
This will depend on the terms and conditions of your mortgage and offset account. Generally, there is no set limit, but there may be restrictions on the amount of interest that can be offset against your mortgage.
In some cases, lenders may impose a cap on the amount that can be held in an offset account. This is because the lender is essentially “losing out” on the interest that would be charged on the portion of the loan that is being offset. They may also charge fees or penalties for holding a large balance in an offset account.
We recommend speaking to your lender or mortgage broker if you have any questions regarding your home loan offset account.
Talk to PhilHow to use an offset account?
Below are the basic steps to using an offset account:
- If you don’t already have an offset account, you’ll need to open one with your mortgage lender. Be sure to check the terms and conditions of the account, including any fees or minimum balance requirements.
- Once your offset account is open, you can start depositing funds into it. This can include your savings, income, or any other money that you can spare. Remember, the more money you have in your offset account, the more interest you’ll save on your home loan.
- You can use your offset account like any other transaction account. This means you can withdraw money, transfer funds, and use it to pay bills and other expenses. Keep in mind, though, that every time you make a withdrawal, your offset balance will decrease, which means you’ll be paying more interest on your home loan..
- To get the most benefit from your offset account, you’ll need to keep a close eye on your balance. Try to maintain a consistent balance in the account, and avoid making unnecessary withdrawals. The more money you keep in the account, the more interest you’ll save on your home loan.
- Consider making extra repayments on your mortgage. This can help you pay off your home loan faster and save even more money on interest in the long run.
- Finally, review your offset account regularly, especially if your financial situation changes. You may need to adjust your strategy to make the most of your savings and reduce the amount of interest you pay on your home loan.
7 Ways to make the most of your home loan offset account
There are some steps you can take to maximise the benefits of having an offset account. These include:
1. Depositing your savings into the account
Most of us are taught from a young age that savings belong in a savings account, where they can earn interest. However, depositing your savings in your offset account will often deliver better results in the long term. This is because the interest you save on your home loan will typically be more than the interest you’d earn with a savings account. Additionally, you’ll be charged tax on any interest you earn, but not on the interest you save. The great thing about putting your savings in an offset account is that you can still access the funds when you need them.
2. Putting any income straight into your offset account
Because an offset account is transactional, it’s easy to get your wages deposited straight into the account. And what many people don’t realise is that interest is calculated daily on an offset account. So, every extra dollar you have in there (even if it’s just short term) will help to reduce the total amount of interest you owe.
3. Use your offset account in conjunction with a credit card
Another way to maximise your offset account is by using a credit card to pay for your monthly expenses. This defers any withdrawals from the offset account until the end of the month when you can make a single withdrawal to pay off your credit card. However, keep in mind that this will only be beneficial if you pay off the credit card in full (and on time) every month.
4. Maintain a consistent balance in the offset account
Maintain a consistent balance in the account. This means keeping as much money as possible in the account at all times to maximize the amount of interest you save on your home loan.
5. Keep your offset account separate from your everyday spending account
To avoid spending your offset account funds on everyday expenses, it’s a good idea to keep your offset account separate from your everyday spending account. This can help you stay focused on your long-term financial goals and prevent you from accidentally dipping into your savings.
6. Consider making extra repayments on your mortgage
In addition to depositing your savings into your offset account, consider making extra repayments on your mortgage. This can help you pay off your home loan faster and save even more money on interest in the long run.
7. Use a mortgage offset calculator
To get a better understanding of how much money you could save with an offset account, consider using a mortgage offset calculator. This tool can help you estimate the amount of interest you could save by depositing your savings into an offset account, and how long it could take to pay off your home loan.
Don’t have a home loan offset account?
An offset account can be a useful tool for reducing interest, but consider all the pros and cons before making a final decision. To find out more about home loan offset accounts, or to see whether an offset account could be beneficial for you, get in touch today on 0421 934 033 or 07 5597 6049.
BOOK AN APPOINTMENT WITH PHIL