Want to reduce the amount of interest you pay on your home loan? It can be as simple as linking your everyday banking with your mortgage using an offset feature.
A mortgage offset account is a feature of many home loans that allows you to offset the money in your transaction account against the balance of your loan, so you only pay interest on the difference.
How much can you save?
It won’t be the best option for every borrower but if used in the right way these types of accounts can cut years off your home loan and save you thousands of dollars. Not every transaction account can be linked to any mortgage – it’s a specific feature offered as part of a home loan.
For instance, if you took out a $300,000 mortgage and have $15,000 in your offset account then you’ll only be charged interest on the balance of $285,000. Over 25 years you’ll save over $32,000, based on an interest rate of 7.09 percent.
One of the best ways to maximise your offset and reduce the amount of interest paid on your mortgage is to have your income deposited directly into the linked account. That’s because the more money in your offset account, the less interest you’ll pay on your home loan.
On the flip side when you deposit savings into an offset account the balance will not earn interest instead you will save on paying interest on your mortgage. But given that most transaction accounts earn zero or little interest, you are not likely to be missing out on a significant amount of income by depositing your savings in an offset account, plus you won’t lose any interest earnings at tax time.
Some offset accounts have restrictions for instance a lender may require a minimum or maximum balance in your offset or a monthly fee – so always read your product disclosure statement before opening the account. Also look for a mortgage offset account that has no ongoing fees, because these can really eat into your savings.
Which lenders offer offsets?
Many lenders – including the major four have offset facilities available on some of their home loans. Last month (July), there were around 280 variable mortgages with an offset feature, according to the RateCity database.
Of the accounts with an offset facility some of the best rates available included Loans.com.au‘s Dream Loan Express at 6.69 percent, Mortgageport Management’s Essential at 6.69 percent and IMB‘s Budget Package Variable $750K+ at 6.82 percent.
So if you have some savings sitting around it might be worth opening a mortgage offset account and if your existing lender doesn’t offer this feature on your current mortgage, consider switching to one that does.