Offset account is a very valued financial tool that can save homeowners thousands of dollars over the life of their home loan mortgage. Understanding how offset account functions and how to successfully use them can result in a big savings and a shorter loan term. In this article, we will see the concept of the offset accounts and explain how they might assist Australian borrowers.
What is an Offset Account?
An offset account is a linked transactional account that operates alongside a home loan. The balance in this account is “offset” against the outstanding balance of the home loan, reducing the interest payable on the loan. For example, if you have a home loan of $500,000 and an offset account with a balance of $80,000, you will only pay interest on $420,000 ($500,000 – $80,000). available, your Loan-to-Value Ratio (LVR, the lower the better), your credit rating, and other variables.
How Does It Save You Money?
By reducing the balance on which interest is calculated, an offset account can save homeowners thousands of dollars in interest over the loan term. Unlike a traditional savings account, the interest earned on the offset account is not taxable, providing an even greater advantage.
Types of Offset Accounts:
There are two main types of offset accounts in Australia:
- Full Offset Account: In a full offset account, the entire balance of the account is deducted from the home loan principal, maximising the interest savings.
- Partial Offset Account: With a partial offset account, only a portion of the account balance is offset against the home loan. This type of account may have a lower monthly fee or may be included as a package feature with the home loan.
How to Make the Most of an Offset Account:
To maximise the benefits of an offset account, consider the following strategies:
- Keep Savings in the Offset Account: Instead of maintaining separate savings accounts, channel your savings into the offset account to reduce the interest payable on your home loan.
- Utilise Your Salary: Direct your salary into the offset account to minimise the interest accrual on your mortgage.
- Minimise Credit Card Debt: By using an offset account to pay off credit card debt, you can effectively reduce the interest charged on the outstanding credit card balance.
Offset Account vs. Redraw Facility:
Understanding the differences between an offset account and a redraw facility is crucial. While both can help reduce interest and pay off your home loan faster, they have distinct features and uses. This section will explain the differences and help borrowers make informed decisions.
Consider an Offset Account If:
- You have substantial savings or cash reserves that you want to use to reduce interest costs.
- You value liquidity and want easy access to your savings without affecting the interest benefits.
- You want to maximise interest savings over the life of your loan.
Consider a Redraw Facility If:
- You are actively making extra repayments and want the flexibility to access those funds when needed.
- You have short-term financial goals and may need to use the extra repayments for other purposes.
- You don’t have significant savings but regularly make additional repayments to your loan.
The Impact on Loan Term:
Utilising how an offset account can potentially shave years off the loan term is essential. Using real-life examples, readers can grasp the long-term benefits of utilising this financial tool.
An offset account is a useful tool that can considerably lower the cost of your house loan. You may save money and attain financial independence sooner if you learn how to manage your finances properly using an offset account.
Remember to compare offset account alternatives from several lenders and talk with a mortgage professional to get the best fit for your unique circumstances.