Watching your mortgage repayments go toward a mountain of interest can be depressing, but you can lower the interest you owe with an offset account. This exciting prospect can create significant changes to your home loan, however there are fees involved. Here is everything you need to know about an offset account to help you decide if it’s the right option for you.
What is an offset account?
An offset account is a savings or transaction account linked to your mortgage. The balance of your offset account can be used to offset the amount you owe on your home loan, and you’ll only be charged interest on the difference.
How does an offset account save you money?
The lender charges less interest because they’re not charging you interest on the full, actual remaining balance of your home loan.
If your mortgage is $400,000 and your offset account balance is $100,000:
– Instead of being charged interest on $400,000, you’ll be charged interest on $300,000, the difference between the loan amount and the offset balance.
What is a partial offset account?
Not all offset accounts are created equal though; some offer only partial offsets which means your offset account will only offset the interest applied to your mortgage by a certain amount.
Eg. If you choose a partial offset account, with a 50% offset, it will only offset the interest bearing portion of your mortgage by 50% of your offset account balance.
In the scenario above, if you chose a 50% offset account, the interest bearing portion of your mortgage only reduces to $350,000, not $300,000.
You can still access money in an offset account
If you’ve got extra cash and want to decrease your home loan, but still want to maintain access to cash for emergencies, an offset account could be ideal for you. Being able to access the funds in an offset account isn’t always a good thing though. An offset account may not be right for you if your main goal is to pay off your home loan ASAP.
Westpac’s head of home ownership, Andy Wright, told news.com.au “Offset accounts provide flexibility, but if the goal for the customer is to simply pay down their loan as soon as possible and not retain access to additional funds, they may prefer to simply pay down their mortgage.”
What are the benefits of using an offset account?
1. You could pay thousands less in interest on your home loan.
2. You can retain access the funds if sudden costs arise, such as a car crash or medical expenses.
3. You won’t need to pay expensive fees to access the cash. This is contrary to the large expenses involved when redrawing on your mortgage if you had put the cash toward mortgage repayments instead of in your offset account.
What are the cons involved in using an offset account?
1. You may be required to pay higher fees for a home loan with an offset account.
In 2015, 27% of Australians with an offset account were charged additional ongoing accounting fees ranging from $5 to $17.
2. You’ll need a significant amount in your offset account.
Unless you have more than $14,000 in an offset account, the fees associated with an offset account won’t be worth it.
If an offset account suits your needs, make use of it to reap the huge benefits and minimise your interest payments on your mortgage.