Mortgage Offset Accounts Explained
With a mortgage offset account (also known as a home loan offset account), you can shave countless dollars and years from the life of your home loan … but how does it work?
After rate cuts, job promotions or even lottery ticket victories – it’s easy to think hopping into the home-buying market will be a simple process where the savvy investor will win big.
However, taking out a mortgage can be wrought with danger, especially if your financial situation changes or a rate change leaves you paying extra each month. Luckily, there are ways to combat huge jumps in your monthly mortgage payments, and one of these is to use a mortgage offset account.
How it works is you’ll take out a standard home loan (you can also do this with other loan types) and a transaction account will be opened and linked to this loan. This account will be identical standard savings accounts – as you’ll receive a bank card for electronic transfers, be able to withdraw money from ATMs as you please.
The Benefits Of A Mortgage Offset Account
The true benefits lie with your loan however. The money (or credit) in your account is offset daily against your loan balance, and this will reduce the mortgage interest charged accordingly. So you might have a $200,000 loan and $15,000 in your offset account. Because of your offset account, you will only be charged interest against $185,000.
By having a decent amount of money in your offset account, you can effectively cut years and thousands of dollars from your home loan. They also work just as well if you have your salary deposited into a standard savings account every payday, so you don’t need a huge amount. When choosing an offset transaction account, look for:
- No balance limit, so you can keep building your savings and cutting down on your home loan term
- An account where 100% of your total balance is offset against your loan
- An equal interest rate to your mortgage
The last dot point is particularly important, as any interest earned in your account will also offset your mortgage interest – so you’ll enjoy further savings. This offset is also completely tax free.