How much do you know about offset accounts?
Let us first begin with a brief explanation and then move ahead with the details. Offset accounts are a type of savings or transaction account that is connected to an eligible home or investment loan. Mortgage offset accounts can be linked either to a fixed or variable rate loan. Having an offset account against your mortgage is a plus factor since it aids in reducing the entire interest on the home loan, thus paying off your mortgage faster.
Offset accounts work by deducting the money in your savings account against the balance of your home loan. For example, your home loan is left with a balance amount of $180,000 and you have savings worth $20,000. Now, if you choose to have 100% of the savings amount offset, then the entire $20,000 is deducted from the mortgage amount, thus leaving with a home loan balance of $160,000.
On the contrary, you can also choose to have a partial offset account like of 30%. If the second case applies then your interest will be payable on a loan amount of $174,000 after deducting the $6000 from the offset account.
So, if a homeowner is aged 25 years and possesses a home loan worth $350,000 for another 30 years, he/she could easily cut off that amount by 6 years and a half if he/she can maintain a savings balance of $50,000 in his/her offset account. So, rather than waiting 30 years to complete the loan, the homeowner will instead pay it all off in 23 years instead. Furthermore, this will also save him/her a lot of money on the monthly interest payments that is charged on the loan.
Types of Offset Accounts
Offset accounts are of two types. They are-
- Balance offset account; and
- Interest offset account
The first one, balance offset accounts, is the most common account. In case of a balance offset account, the interest payable on a mortgage is deducted from the savings amount. The deductions can be partial or full as per your choice.
Interest offset accounts, on the other hand, deduct the interest payable on a mortgage by the interest earned on the offset account. The interest earned on your savings is considerably lesser than the interest rate on a mortgage, which makes the choice less favorable and common.
As a homeowner, you must be advised that it is only variable rate loans that have the option of a 100% offset account. In case of split loans, homeowners are allowed to have an offset account that can help them reduce the amount of the variable portion of the loan.
Advantages of an offset Account
Other than the feature of reducing your loan term and saving interest, an offset account has several other advantages if chosen well. Here are some advantages to look forward to.
- You can easily manage an offset account. All you require to do is link your standard savings account or transaction account, where you receive your salary, as an offset account to your loan. The deductions would be calculated automatically and you will save more money on your monthly interest payments.
- As homeowners even when you have an offset account you can still have easy access to funds, while still reducing the interest payments on your mortgage. Hence, if ever your financial situation alters, you can still use the money that is offsetting your mortgage, rather than looking for money elsewhere.
- You have all the flexibility to use the money in an offset account in case of emergencies like an accident, a car crash, a medical emergency and so on, wherein you would require to pay a chunk of money. Furthermore, unlike redraw facilities, you do not require to put in an application and wait to get the money in your hands.
- Offset accounts have low or no account-keeping fees and some transaction fees levied to it. But, that amount is minimal and does not make much difference to your account.
- Offset accounts are tax-free, unlike your traditional savings account.
Nevertheless, even when you are choosing to use an offset account, you also need to be aware of its cons as well. The financial advantages that you reap from your offset account are dependant on many factors like the amount of money that you choose to deposit in the account to the interest rates and fees of comparable loans. A wise option is to talk to a financial advisor regarding the same and then weigh out your options as to whether an offset account is right for you.
Conclusion
Whether you are a spender or a saver, an offset account is a good choice to cut off some years from your loan term. It never hurts to be mortgage-savvy and save yourselves hundreds of dollars for the future. Just ensure that you choose the right type of offset account wherein 100% of your total balance is offset against your loan. Also, ensure that there is no minimum or maximum balance on your offset account. This way you can put every cent in your offset account to use and grow your savings as well.
Disclaimer:
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