What is a Mortgage Offset account?
A mortgage offset account is a transaction account that’s linked to your home loan. Like other transaction accounts you’ll be able to withdraw money from ATMs, pay bills and transfer money electronically. When the bank calculates your home loan interest, however, they offset your loan balance by the credit amount in your offset account.
For example, if you have a $200,000 home loan charging 5% p.a., you will pay $833 interest per month, but if you have an average of $10,000 in an offset account, interest will be calculated on $190,000 and you will only pay $792 interest per month.
- Over the life of your home loan, a mortgage offset account could save you years and tens of thousands of dollars in interest. Check out this calculator to see how much you could save.
- It’s like earning high interest (at the rate the bank charges for home loans) – tax free.
- Even though the balance is reducing your home loan interest, you have unrestricted access to your money.
- Often the cheapest home loan rates are offered for basic mortgages without ‘bells and whistles’ like offset accounts, so if the balance of your offset account is likely to always be low, the benefit may be outweighed by higher fees and interest rates. If you are struggling to meet the mortgage repayments and unable to accumulate savings you might not benefit from a mortgage offset account.
- Mortgage offset accounts are only offered on variable rate loans so they restrict your ability to lock in fixed term mortgage rates, but you can address this by splitting your loan.
More Bang For Your Buck
You can maximise these benefits by having your salary transferred direct into your mortgage offset account.
Your outgoings will be spread out over the month so even your monthly expenditures help you save on interest payments.
What are your thoughts?
Are you planning to enter into a mortgage soon, or refinance one? Do you think a mortgage offset account could be right for you? Is there anything else you’d like to know about borrowing to buy a home?