Tuesday 15th August 2023
Among the strategies to pay off your home loan faster and save money long term, a mortgage offset account is one of the more attractive options.
An offset account is another bank account which, rather than earn interest on any savings, reduces the amount of interest on your monthly loan repayments. Every dollar in your offset account will reduce the amount of interest you pay while it is in your account. The interest is calculated on a smaller principal amount, saving you money.
If your loan amount is $600,000 and you have $10,000 in your offset account, daily interest is charged on the amount of $590,000. The more money you have in your offset account, the bigger your savings on interest payments.
Lenders do not offer an offset option with every mortgage. A good finance broker can help you secure a loan that is eligible to have an offset account attached to it.
There is no limit on the amount of money you can withdraw from the offset account. It is no different to withdrawing money from any bank account, though it will readjust the calculation on your loan repayments.
It pays to maintain a decent balance in the offset. If you can, have your salary or wages paid directly into your offset account, so your money is offsetting your interest during the month. If you were able to maintain a balance of $20,000 in an offset account over a 30-year, $500,000 loan, you can potentially save more than $25,000 in interest …. and you would pay off the loan sooner!
The offset feature is usually only available on variable rate home loans, although some lenders offer an offset feature on selected fixed rate home loans. A broker can look into this for you.
One downside to an offset account is lenders will charge you for it, usually a monthly fee. The offset could also be part of a package which will incur an annual fee.
It may be worth considering whether the amount of interest you are likely to save will be more than the fee. A broker can help you do the numbers to determine whether an offset account is right for you.