August 29 2017 | Fletcher Rowe
It’s one of the most commonly queried yet poorly understood components of the modern mortgage, and not knowing its function could be costing you thousands in interest charges over the course of a year, let alone the life of your loan.
You may be aware it’s out there, but knowing what it does and how to use it lets you take advantage of those package fees and claw a little bit back from the bank.
A mortgage offset account is essentially a bank account that is linked to your home loan. The balance of this account is used to “offset” the balance of your home loan, effectively reducing the amount of interest charged on loan. Rather than paying interest on the entire balance of the loan, you instead just pay on the difference in balances between your linked accounts.
To put this in context, say your home loan has a balance of $500,000; at a 4.50% interest rate, you will pay up to $22,500 a year on this balance.
If you had a offset account with a balance of $50,000, you’d only be paying interest on the difference – $450,000.
Offset accounts can be linked to some variable rate loans, and even selected fixed rate loans. Generally, there are two types of offset accounts:
Full or 100% Offset:
100% offset accounts provide the most benefit to the consumer. As the name suggests, 100% offsets use their entire balance to offset that of the loan. Using the above example, an offset of $50,000 against a loan of $500,000 at 4.50% would save you up to $2,250 per year as well as knocking almost 4 years off your loan.
A partial offset account will only be worth a percentage of its actual balance. If it is a 50% offset account, the benefit will be half, likewise a 25% offset account will only see a quarter of the offset effect.
The beauty of an offset account is it operates the same way as a normal bank account. Money can come and go as you please and there are usually no account keeping or establishment fees. Effectively, you let your money sit there and watch it save you money without doing a thing.
Money that comes into a rental account, pay from your employer and your savings can all be used to offset your loan balance. A lot of time, you can link to multiple bank accounts and accumulate the benefit.
The best term deposits and high interest savings accounts are currently offering up to about 3.00% p.a. While an offset account won’t grow like these savings accounts, their interest benefit is exactly that of your mortgage which may now be approaching 5.00%.
Very often, we have to politely yet firmly encourage many clients to take advantage of these benefits to reduce the burden of their home loans. We look forward to the day we find a client who wouldn’t benefit from at least one offset.
Get in touch if you’d like to find out more.
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