Getting a home loan with the right features is one of the simplest ways to reduce your costs in the long term. A mortgage offset account is one feature that could make a huge difference, potentially saving you thousands of dollars per year, and may help you repay your mortgage sooner.
What’s a mortgage offset account?
A mortgage offset account works like a regular savings or transaction account but is linked to your mortgage. You can deposit, withdraw or transfer money to and from your mortgage offset account as often as you like. However, the money in this account is used to “offset” your outstanding home loan balance, reducing the amount of interest you’re charged.
For example, if you have a $500,000 mortgage and keep $40,000 in a 100 per cent offset account, you’ll only be charged interest on $460,000. Thus, if you keep more money in your offset account, you’ll be charged less interest on your mortgage. However, your repayment amount will usually not change. Instead, a larger part of your regular repayment will be paying down the principal. This means you’ll be repaying your home loan faster while saving money on interest.
You may choose to have your salary paid directly into your offset account to maintain a balance. You can then transfer amounts out of your offset account into your transaction account to use for your day-to-day spending. This will keep funds in your offset that can reduce the interest paid on your mortgage and help you budget better if you only withdraw the money you need.
What are the benefits of a mortgage offset account?
If you have some savings available, putting them in a mortgage offset account could help make your money work harder for you. This may not save you money on your regular repayments, but may save you money in the long term and help you repay your home loan sooner.
For example, assuming you have a $500,000 mortgage, $40,000 in your offset account, an interest rate of 3 per cent per annum and a 25-year term, you might be able to pay off this mortgage 29 months sooner and save over $71,000 in interest charges (This example is only an illustration, and the actual figures may vary according to the terms and conditions of your loan).
Lowering how much you pay in interest is the most obvious potential benefit of mortgage offset accounts, but they aren’t the only benefit. Another benefit is that because the money in your offset account helps to reduce the interest charged on your mortgage, rather than earning interest like a regular savings account, it won’t increase your taxable income. You may find it a good strategy to put any extra income or windfalls, including profits from investments, into an offset account to lower your mortgage repayments and potentially save on tax as well.
Instead of using an offset account, you could put your savings or extra money into your home loan directly through additional repayments. This will have the same impact on your home loan in terms of saving on interest and helping you pay it off sooner. However, if you choose this option, your money may be locked in your loan. This will make it harder to access unless you have a redraw facility (which might have fees attached). When you use a mortgage offset account, there are generally no restrictions on depositing, transferring and withdrawing money if you need or want it.
Is an offset mortgage always a good idea?
Despite the benefits, there are also some potential disadvantages of an offset mortgage that you need to be aware of. Some of these include:
- A mortgage with an offset account may have a higher interest rate than a mortgage without it.
- Some lenders may also charge a monthly account-keeping fee.
- Some lenders might also charge you each time you withdraw money from the account.
One way to calculate whether an offset mortgage is worth it is by calculating your annual costs versus the expected savings. Usually, an offset mortgage is most helpful if you’ve got a reasonable sum of money you can keep in your offset account.
If, however, you think you’ll be paying more than you save, it might be worth considering a basic no-frills home loan. Paying an extra fee for a feature, like an offset account, when you only have a few hundred dollars saved in the account may even leave you worse off.
It’s also helpful to read the fine print when comparing offset mortgages. Some only offset a percentage of the account’s balance and not all of it. For example, with a 50 per cent offset account, only half of the balance in your account will be used to offset your outstanding loan. Some lenders may also have a minimum balance requirement to set up an offset account, so make sure to check with your lender if you’re eligible for one. Or, you could connect with a mortgage broker for obligation-free expert advice on mortgages and help in crunching the numbers to make an informed choice.