Want to avoid sinking your entire savings balance into your mortgage? An offset account could be the solution you’ve been looking for.
An offset account is straightforward to set up and easy to understand. It also has the potential to save you thousands of dollars and could shave years off your mortgage.
Got your interest yet?
Yup! But what’s an offset account?
Basically, an offset account is a regular transactional account which is linked to your home loan.
The advantage is that you only pay interest on the difference between the money in the account and the mortgage.
Banks usually offer two types of offset accounts – full offset account, or partial offset account.
A full offset account means that the entire amount in the account is deducted from the principle before you start to pay interest.
In a partial offset account, a reduced interest rate on the mortgage is offered on the equivalent amount in the offset account.
Whichever you choose will depend on the bank and the type of mortgage you have.
How does it work?
Say you owe $350,000 on your mortgage, and have $50,000 in a savings account that you currently use for regular transactions.
If you move that $50,000 into a full offset account, you’ll only pay interest on $300,000 (which is the difference between that amount and the loan principle).
The offset account can then continue to be used for all your daily needs, like receiving your salary and withdrawing cash.
Why else would you consider an offset account?
Well, say for example that you had a savings account with a 3% interest rate and a mortgage with a 5% interest rate.
By allocating money into your full offset account, you’d save more money on interest than you would earn in your savings account.
Additionally, interest on your savings accounts are subject to tax, whereas the interest-saving on your mortgage isn’t.
How much can it save me?
Under the right circumstances, a lot.
Using the example above, if you’re 35 when you take out a home loan, you could shave years off a 30-year loan term just by keeping $50,000 in the offset account.
This means your loan could be done and dusted right in time for your retirement.
Is it right for me?
Of course, there are some additional factors to consider, such as account keeping fees and the minimum amount needed in the account to make it useful.
As everyone’s situation is different, get in touch and we can discuss whether an offset account might be suitable for you.