What is it and how does it work?
An offset account is a cash account that is linked to your home loan. The bank will apply monthly interest charges (calculated daily) on your mortgage based on your home loan balance minus your offset account savings. For example, if your home loan is $450,000 and you have $25,000 in your offset account savings, you will only be charged interest on $425,000.
For this reason, setting up an offset account linked to your home loan account is a key strategy in itself to reduce your interest payments. An offset account functions in the same way as a regular transaction account with the added feature of being linked to your home loan account to ‘offset’ the interest repayments.
We have summarized the key strategies to implement when managing your offset account to ensure you maximise its benefits.
Pay your income into your offset account
By having your income paid directly into your offset account, you are keeping the balance of the account as high as possible during the month. The bank will calculate your interest daily based the balance of your home loan minus your offset savings. If you were to have your income sitting in a different account that wasn’t linked to your home loan, the bank would have less savings to ‘offset’ the interest it calculates daily. The goal is to keep your offset balance as high as possible at all times.
Set up your direct debits for end of month
The bank calculates your interest daily then charges it monthly, at the end of the month. By setting up all your direct debits to be deducted at the end of the month, you keep the balance of your offset savings as high as possible during the month so you have a higher balance to ‘offset’ while the bank is making interest calculations daily during the month. This means lower interest payments end of month! YES! Winning!
Use your offset for savings
An offset account does not earn interest, its purpose is to save you interest on your home loan. Rather than having a separate savings account, pool your funds into your offset account to save the interest you would otherwise be paying on your home loan. Higher savings in your offset = lower monthly interest payments on your home loan. Interest rates on home loans are significantly higher in comparison to savings accounts. Your interest rate on your home loan may be around 4% where as a savings account is at best generally 2% -3%.
Do your research, find the right features for you – not all offset accounts are equal!
Not all offset accounts are created equal, a mortgage broker can play a very helpful role here in helping you identify which offset account with what features will the right solution for you. A couple of features that may vary are; whether the account is 100% offset – the entire balance is offset against your home loan and at-call access to your funds – if you can access your offset account funds at any time, there is more incentive to increase the balance.
Launch Finance are here to help you on your journey to home ownership and can present you with several solutions to meet your financial goals. Start with a complimentary strategy session to review your finances and set you on your path to home loan success (08) 9367 4222, [email protected]