What is an offset account?
31 July 2015 M'OR Mortgage Options
A 100% Offset transaction account can be a great tool to help you save interest on your home loan. Depending on your lender, an offset account can work just like any other transaction account with money coming in and money going out.
Like a normal transaction account, you can deposit and withdraw funds from your offset account whenever you like via eftpos, atm, internet banking or visiting a branch. However, because it is linked to your home loan, it can help you reduce the amount of interest you incur on your home loan.
How can an offset account help me to save interest on my home loan?
The main difference between an offset account and a savings account is that instead of earning interest on money sitting in a savings account, you save interest at the rate you’re paying on the loan it is linked to.
This works to your advantage as the interest rate you pay on your home loan is generally higher than the rate you earn on a savings account. This means that for no additional risk, you can save more interest that you could earn, as per the following example.
If your $500,000 home loan was linked to a 100% offset account containing $50,000 cash, the lender will only charge you interest on the net debt you owe i.e. $450,000.
Since interest is calculated on a daily basis, to gain the most benefit, you should try to leave as much cash as possible in your offset account for as long as possible.
If we take this further, let’s say your home loan has an interest rate of 5%p.a, with the rate on a savings account being 3.5%p.a.
Over one year, you could earn $1,750 in interest with your $50,000 in a savings account.
However, if this was offset against your home loan instead, you could save $2,500 in interest over the same year.
In this example, you are not only $750 ahead, but since you haven’t ‘earned’ any interest, there is no reportable interest income.
An offset account can also work to your advantage if you plan to make your current home an investment property in due course.
Maximising the interest savings
Since interest is incurred on a daily basis, the longer you keep money in your offset account, the more interest you can save.
With this in mind, many clients like to use a credit card to pay for all their expenses and then pay this bill off in full at the end of the month. This way, you end up keeping more money in your offset account for longer which helps to reduce the overall interest incurred on your home loan.
If you don’t currently have an offset account attached to your home loan, or you’re not sure you’re using it to maximise the benefit, we can help.
*Please note this general information is provided as a guide only. You will need to refer to the PDS provided by your specific lender to ascertain specific information about any specific accounts. MO’R MORTGAGE OPTIONS does not warrant or represent that the information is free from errors or omissions or is suitable for your intended use. General information is provided here with regard to what options might be available but does not in any way provide a final recommendation with regards to specific lenders, specific loan features, products or loan amounts
MO’R Mortgage Options are a local family owned business under the guidance of Michael O’Reilly. Michael and his team of professionals have extensive experience in the mortgage industry and provide exceptional service to their clients. It is for this reason that MO’R Mortgage Options are our trusted and preferred recommendation to our friends and clients.