If you have a $500,000 mortgage and $30,000 in an offset account, you only pay interest on $470,000. This can save you a significant amount of money by reducing your interest over the life of your loan.
Offset accounts can generally be used for savings like any other bank account. Lenders may offer them with variable rate mortgages, and less commonly, with fixed rate mortgages. If you are thinking about taking out a mortgage, ask your lender if they offer offset accounts and compare the features and benefits of the complete product before making a decision.
Different types of offset accounts
There are two types of accounts: full and partial offsets. Full offsets offer the most benefit, as they allow you to use the entire account balance to offset the interest on your loan. A partial offset only allows a portion of the loan balance to be offset, to help reduce interest repayments.
It’s important to note that not every lender offers offset accounts and is worth considering when shopping for a home loan.
How an offset account may be beneficial
As mentioned earlier, the main advantage of utilising an offset account is that it could save you money by reducing your interest payments. It effectively lowers the amount of interest you pay on your loan by using your savings to offset the principal money owed. This can make a big difference over the life of your loan, especially if you have a large sum of money saved in the account. On the same note, having an offset account can help you become debt-free quicker.
Lastly, an offset account gives you greater flexibility to access your funds while making transfers/withdrawals as needed without incurring any penalties. Making extra repayments is extremely helpful in paying off your loan sooner, but it can affect your future liquidity if you need cash for an emergency situation. An offset account provides nearly the same gains, plus the peace of mind knowing you can access funds at any time.
How an offset account may not suit you
However, there are some potential drawbacks to having an offset account. First, lenders may charge an additional fee or increase your interest rate to include an offset account with your loan. The key to making an offset account work for you is to make sure that you keep enough money in the account to save more money on interest repayments than any potential costs of keeping the offset.
Secondly, it is important to check if you can transact straight from the offset account instead of first needing to transfer funds into a transaction account.
Simple ways to make the most out of your offset account:
1. Make regular deposits – The more money you have in your offset account, the more interest you’ll save. Try to make regular deposits (e.g. every time you get paid) so that your balance keeps growing.
2. Transfer surplus funds – If you have any spare money (e.g. from a tax refund), consider transferring it into your offset account to further reduce the interest charged on your loan.
3. Flexibility – An offset account gives you easy access to your funds if you need them for everyday spending or in the event of an emergency.
WLTH customers are able to access their mortgage offset accounts directly through the soon to be launched Convego® Parley Ocean Visa Debit Card. To learn more, ask one of our lending specialists directly or contact your mortgage broker about WLTH!
Any advice provided is general in nature and should be considered in line with your financial situation, needs and objectives
