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 an offset account? Is it worth having a mortgage offset account? And how can you make the most of your home loan offset account?
What is a Home Loan Offset Account?
An offset account is a transactional account that is connected to your mortgage. 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.
Is It Worth Having an Offset Account?
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!
How Can You 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.
An offset account can be a useful tool for reducing interest, but it’s important to 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.