Using your Offset Account Effectively
What is an offset account?
It might sound a little ‘high-brow’, but an offset account is simply a savings or transaction account linked to an eligible home or investment loan – with the goal being to reduce your mortgage interest.
It should operate the same as any other savings or transaction account, i.e. with a bank card for electronic transactions/transfers and the ability to withdraw money at ATMs, etc.
Offset accounts are usually only available for variable home loan accounts. A small number of lenders allow an offset account to be linked to a fixed rate, but there are usually restrictions around them. If you want to use an offset account, but also like the security of a fixed interest rate, your best option may be to split your loan with a fixed portion and the balance as variable.
Check with us if you are unsure, we can help you figure out what works best for you.
How does an offset account work?
Money in your account is ‘offset’ against your loan balance. In layman’s terms, it is as if you have already paid the balance of the offset amount off your home loan, which reduces the mortgage interest you pay.
For example, if you had a $300,000 loan and $20,000 in your offset account, you will only be charged interest on $280,000.
100% offset accounts are the most common form of accounts.
What’s better? An offset or a savings account?
The interest earned on a savings account will usually be less than lenders charge in interest for home loans, plus tax will be payable on interest earned on your savings.
By comparison, an offset account could potentially save you thousands over the life of a loan.
Of course, an offset account is not the only feature that may be packaged with your home loan – there is no ‘one size fits all’ solution. In the end, the features included with your home loan should be those that are most suitable for you and your individual circumstances.
How to best use your offset account
Place as much of your savings/money into your offset account as possible. The best way to do this is to use the offset account as your everyday banking account. Have your salary or wages paid directly into your account to ensure that you have the maximum amount of funds in the account at all times to offset interest charges. You will still have immediate access to your money as with any normal account.
This way you are always paying the least possible interest on your loan.
Use your credit card interest free period
Pay for all your monthly expenses on your credit card within the interest free period and then pay the full balance before the due date. This way you gain the benefit of free funds from the bank to pay your bills while your money remains in your offset account, which again helps in reducing your interest bill.
This only works if you pay the credit card balance within the interest free period. If you don’t, the interest payable on your credit card is significantly higher than the interest saving of funds in your offset account.
The idea is that you are also using the account to accumulate your savings.
You need to be disciplined to make sure your savings grow over time. The best way to do this is to establish a budget and monitor your actual expenditure against it. As you see your savings and the balance grow it is often tempting to spend it – so be careful!
If you know you lack discipline, and tend to spend any readily-available money, you may want to:
- Use the offset account as a savings account only
- Not have the offset account linked to your keycard or eftpos card to limit your ability to gain immediate access to the savings
- Set up two offset accounts (some lenders will allow this). You could use one for everyday living and the other for savings.
If you choose to use this approach, make setting aside your savings the first thing you do when you are paid, this forces you to be more disciplined with your expenditure.
In summary, an offset account is a very helpful tool for reducing the interest on your loan, so make sure you look into setting one up today!
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