What is an offset account? Should you get one?
An offset account could help you pay off your home loan quicker
Offset accounts can be a handy home loan feature. Most lenders offer an offset account product. It usually comes in a “professional package” home loan which provides the home loan, an offset account and a credit card. Professional package loans generally have an annual fee which can range from $300 – $400.
What is an offset account?
Think of it as a savings account which is linked to your home loan. With a traditional savings account you earn interest on the money you have in the account. With an offset account, instead of being paid interest on your savings you reduce the interest on your home loan.
Here’s an example of how an offset account works
Let’s assume you have a $300,000 mortgage with a linked offset account that holds $100,000 of your savings. In this instance, the interest you pay will be based on $200,000 (your mortgage balance minus the amount of savings in your offset account). Because you’re paying less interest you’ll be paying more off the actual loan principal – meaning you’ll pay off your mortgage quicker.
The interest you save is calculated daily so it’s a good idea to have your salary paid straight into your offset account each pay. It all helps!
Some borrowers take it one step further. They use the credit card that came with their home loan package to pay for their everyday expenses – and then clear the credit card balance each month with the savings sitting in their offset account. The benefit here is twofold. They often accumulate rewards points on their credit card throughout the month and they save some additional interest on their home loan repayments by leaving their savings in the offset account for the month.
It’s important to be disciplined with the above approach (using a credit card for expenses) and ensure that you clear the credit card debt each month before interest is charged on the card!
How do you access the funds in your offset account?
It’s quite easy. Most offset accounts come with an ATM debit card so funds can be accessed via that method. Otherwise – it’s easy enough to transfer funds from an offset account via your online banking. Having said that, whenever you take money out of your offset account you’re increasing the interest payable on your home loan.
Should you get an offset account?
Possibly! They can work for a lot of borrowers – and could be unsuitable or unnecessary for others. To find out whether an offset account is an important feature for your home loan get in touch and we’ll provide some tailored advice based on your circumstances.
About the author: Jamie is the owner and founder of Pass Go Home Loans and operates between the Noosa and Canberra offices. If you’d like Jamie to provide you with some credit advice – just complete and return this FORM
This information is not intended to act as financial, investment, legal, accounting or taxation advice – and for that reason should not be relied upon as specific advice for your situation. You should always obtain independent, professional advice prior to making any financial, investment, legal or taxation decisions.