5 Step Guide to Offset Account Bliss
by Andrew Willink
2 July 2008
Many variable rate package or premium home loans come with an ‘offset account’. This is simply a bank account which has some sort of transaction facilities attached, such as a debit card or EFTPOS card. The real beauty of an offset account however, is not the convenience it offers, but the fact that every dollar in the account offsets interest on your home loan. For example most offset accounts offer a 100% offset, so if you had $5,000 sitting in your offset account and your home loan had an interest rate of 9.4%, you would effectively be saving 9.4% per annum, or $470 each year of the home loan.
This may not seem like much, but over a 30 year loan the savings can add up to hundreds of thousands of dollars if you keep adding funds to the balance of your offset account over the years. The most effective time to add extra money to your offset account is at the start of the loan, yet this is often the time at which we struggle to meet the minimum repayments. You may be young, and it may be your first mortgage. Your salary may be only just enough to pay the mortgage and still put petrol in the tank, but by using the methods outlined below you can still benefit substantially by living out of your offset account.
1. Get your salary deposited straight into your home loan offset account
In doing this, you are offsetting your home loan interest from pay day one, rather than a few days later when you get around to transferring the funds to your offset account. Best of all, it happens automatically, so you don’t even have to think about it! It’s an automatic savings plan, and it’s working to pay off your home loan sooner, and with less effort!
2. Put everything on plastic
This step is only for those who have no debt on their credit card, and are confident they can pay off the entire balance every month! By paying for everything on credit, you can extend the time in which money is sitting in your offset account. So instead of paying the electricity bill by direct transfer, if you put it on your credit card that money stays in your offset account and earns you interest for another month.
For example, if you spend $2,000 a month on expenses, and your offset account earns 9.4% interest, you’ll save around $15.66 a month by paying for everything on credit and keeping that $2,000 in the offset account for an extra month, until the credit card bill is due. This will also see your credit card reward points rack up much faster.
3. Profit from points
Step two has a two-fold benefit. Not only does it boost your offset account temporarily, but it also earns you valuable credit card reward points. Compare credit card reward programs and sign up for the card and program that suits your spending habits. At the end of the year you could end up with a couple hundred dollars worth of rewards, and that could be put back into your offset account in the form of ‘cashback’ rewards offered on some credit cards, or converted to flights or food vouchers. There are a million and one rewards on offer and there is no reason not to make the most of the reward programs on offer.
4. Only use cash when you have to
If you can pay off your credit card balance in full every month, then there is another way to maximise your credit card rewards, and that is to minimise the use of cash. While we are not yet a cashless society, you can pay for most things on the plastic and in doing so maximise the time your cash is earning you interest in your offset account, and at the same time earning you reward points.
5. Pay off your card in full
So now you know how to save on home loan interest by living out of your offset account. But if you’re still paying interest on your credit card, all your good intentions could be in vain. To put it simply, paying off your credit card in full every month (using bpay or direct debit from your offset account) should be a top priority. Your credit card interest rate will be far higher than your home loan rate, so keeping that debt at zero is essential.
Using an offset account properly can save you thousands over the life of your home loan and slash years off your mortgage. Once you get into the habit of organising your finances in this way, you will never look back.
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