As mortgage brokers we get asked loads of questions, and we love it! One frequently asked question in the mortgage broking business is ‘what is a mortgage offset account and how can it benefit me?’ With all the different mortgage options available and the mortgage offset account often touted as a major feature of the loan, it pays to know how to use it to save money and get ahead on your mortgage repayments.
Mortgage offset accounts or home loan offset accounts may save you money, reduce the amount of time it takes you to pay off your loan and help to insulate you against interest rate rises.
So, how do offset accounts work?
A mortgage offset account is effectively a savings account that’s attached to your home loan. It has all the usual benefits of a regular savings account, allowing you to make deposits and withdrawals, giving you a credit card attached to the account, plus it pays you interest.
However, unlike a normal savings account, a mortgage offset account pays interest at the same rate as your home loan. This is usually more than a regular savings account and it’s where you can make big savings on your mortgage.
Just like the name implies, the money in your mortgage offset account is deducted from your loan balance daily. For example, if you have a $200,000 loan and $15,000 in your offset account, you will only be charged interest against $185,000. This can considerably reduce the amount of interest you need to pay, so your monthly mortgage repayments reduce the loan amount faster.
A mortgage offset account will even work for you if you don’t have a lump sum to deposit. Just by depositing your salary into it each month and using it like a regular account to make payments and withdrawals etc., you can save thousands over the life of your loan.
Another benefit of mortgage offset accounts is that they’re completely tax free. Where you would have to pay income tax on the interest paid on a regular savings account, mortgage offset accounts carry no such penalties.
What to look for in an offset account
With interest rates so low, lenders are being more competitive by offering some great features to mortgage offset accounts to make their loans more attractive. When we help you look for a loan with an offset account, we consider the accounts that give you as much flexibility as possible, preferably with the following features:
- No balance limit. If your mortgage offset account has no balance limit, you can use it like a regular savings account to save up as time goes by. The more you accumulate in your account, the bigger the benefits in terms of savings on your home loan.
- An account where 100% of your balance is offset against your loan, calculated daily. This will afford you the maximum financial benefit in terms of savings against your loan. Some accounts only calculate on the lowest monthly balance or the average monthly balance, so it’s important to get an account that calculates savings when the balance is also high.
- An equal interest rate to your mortgage. This is a common feature of most mortgage offset accounts, but it’s wise to ensure the rate will move with your home loan, again ensuring maximum savings. It’s particularly important because that way, any interest earned by the money in your offset account will also offset your mortgage interest thereby helping you pay off the loan capital faster.
- A credit card with a low interest rate. Often mortgage offset accounts offer credit cards with a much lower rate of interest than regular credit cards. This can be particularly useful when setting up your home or if you’re doing renovations.
How does it help to cut down on the length of my loan?
Usually your monthly loan repayment pays part interest and part capital on the loan. When you have a mortgage offset account, the balance is deducted from the loan so that the amount of interest you pay each month is less. If your mortgage repayment stays the same, you are therefore paying more off the capital of the loan, reducing it quicker.
Here’s an example (calculated on a 5.88% interest rate).
Let’s just say you have a home loan of $150,000 over 30 years. Without an offset account, you would pay $167,000 in interest over the life of your loan.
If you had the same home loan with a mortgage offset account containing a balance of $10,000 for the life of the loan, you would only have to pay $127,553 in interest. What’s more, the additional money coming off your home loan balance would pay the loan off in 26 years and 4 months!
This represents a saving of $38,636.95 plus three years and eight months on the term. Obviously, the more money you have in your offset account, the more you will save and the quicker you will pay off your loan. What’s more, your mortgage offset account will give you the additional flexibility of having money on hand if you need it.
How do I find the right loan with the right offset account?
With interest rates currently at historical lows, many lenders are offering great mortgage offset accounts to make their loan products more attractive. There are literally hundreds of loan products on the market, tailored to a variety of different uses. You can get loans with mortgage offset accounts for regular home loans, property investment loans and even for construction and renovation purposes.
That’s where we come in. With access to a wide variety of lenders, we can pick and choose. We do all the leg work to find you the right product for your particular needs and personal financial circumstances. To find out more, simply call us for a chat.