How An Offset Account Works
For those considering paying their home or investment property loans off faster, then an offset account is definitely a feature you may want to consider adding to your mortgage loan.
Offset accounts were originated after borrowers who had Lines of Credit types of loans became disillusioned with their use, because of the temptation of over spending.
Lines of Credit only require you to make interest only repayments, or worse yet, in some instances you didn’t have to make any repayments at all. You could (and still can) just let the interest capitalise back up to the approved limit.
In contrast, Mortgage Offset Accounts do actually require you to make a principal and interest or an interest only repayment on a regular basis.
In simplistic terms the way they work is, in addition to your loan account you have an additional transaction account alongside your mortgage account into which you deposit your money.
And any balance that is in the offset account on a day to day basis automatically offsets against your mortgage balance. In other words, if you have $6,000 in your mortgage offset account and a $400,000 mortgage that you’re paying interest on, then the $6,000 offsets againts the $400,000 and you only pay interest on $394,000.
If you would like to access information on a Mortgage Offset Calculator for use in calculating the savings on your mortgage please follow this link: Offset Calculator
This money can be the normal cash flow from your salary/s and also any other money you have access to such as existing savings. Or, even one off payments to you such as proceeds from the sale of a car etc. that you only want to temporarily put somewhere for later use.
Today’s Mortgage Offset transaction accounts harness the benefits of modern home loan technology, which calculates the interest daily on the balance of your home loan and then charges it to your home loan account monthly in arrears.
If you don’t already have one, consider refinancing your existing home loan and start saving.
So, it tracks all of your deposits and withdrawals on a daily basis and automatically calculates your loan balance and any offsets against it.
The Offset Account works like a savings account, with one big difference, in that any balance in it, offsets against the mortgage balance.
For example let’s assume John and Mary have a $400,000 mortgage and in another account somewhere they’ve stashed away $20,000. If they transfer the $20,000 into the Offsetting account, it will then offset against the $400,000 mortgage balance.
Which means instead of the bank calculating and charging them interest on $400,000 they will only calculate the interest on $380,000.
Additionally John and Mary can also pay their regular salary’s into this account with no loss of convenience.
Because, as we mentioned previously, it operates just like any regular transaction account by having internet and phone banking, ATM and Eftpos access as well as B-Pay features etc all attached to it.
You do this by using an interest free credit card and putting most of your regular monthly expenses onto it, so you don’t have to draw down on the money you’ve deposited into the Offset Account during the month. This leaves the balance in the account as high as possible for as long as possible (remember we said they calculate the interest on the mortgage’s daily balance, including allowing for any offsets).
Then you arrange with your lender to have an automatic electronic sweep set up that will sweep any balance you’ve accumulated on the interest free credit card during the month back into your Offsetting transaction Account, which means you won’t carry any credit card balances forward each month.
But, you’ve been able to use the banks money interest free all month, while your money has been offsetting against your mortgage and saving you even more money.
Albert einstein has been rumoured to have said that compound interest is the most powerful force in the universe. We all know banks have known this for years. Why not get it to work for you?
In the meantime, the money you would normally have drawn out of your account to pay your regular daily running expenses during any monthly period has been at work for you in the Offsetting Account saving you additional interest on your home loan.
Most home loan lenders offer Mortgage Offset Accounts, but in the main there are a few conditions attached. Normally you have to qualify for what is known as the variable interest rate professional packages of these lenders. And, this is where you have to borrow a certain amount of money, usually $250,000 and more, although there are exceptions to this rule.
These professional package type loans offer a discount off of the lenders market variable rate and the size of the discount can depend on the size of the loan.
Also, with these types of professional package loans there are usually annual fees charged for the privilege, but no monthly fees. However, if you use the offset facility efficiently it will more than compensate you for any fees charged by the lender.
Another consideration to take into account is that not all of these Offset Accounts offered by lenders are the same, as some operate more efficiently than others.
At the end of the day, if you’re keen on paying your home loan off as fast as possible you should endeavour to utilise every tool you can. Because, your owner occupier home loan is non-tax deductible debt, which you pay off with your after tax dollars.
For example if you had a home loan of $420,000 that had an average interest rate over the life of the loan of 7.25% and you paid that off over thirty years you would end up paying principal and interest payments totalling $1,031,450 to the lender .
Then, if you calculated how much you had to earn to get those after tax dollars to give to the bank to pay off your home loan, then you start to realise why most of us can sometimes feel we’re trying to ride our bike uphill without the chain being attached when it comes to paying a mortgage off.
Equity Resource Pty. Ltd. is a Sydney based Financial Services/Mortgage Brokering/Investment Property Consultancy Firm servicing the greater Sydney Metropolitan Area.
Per chance you don’t reside in the Sydney area we would still be happy to assist free of charge and help save you money on your home loan. Please still feel free contact us.
Please note: The above information is for general information only and before using any of it for your personal use we strongly suggest you seek professional advice first. We take no responsibility for any outcomes you may personally experience from using this information.
Equity Resource Pty Ltd
PO Box 8056
New South Wales
t) 02 8861 1689
f) 02 8861 1717