Get The Best From Your Offset Account
In the past, we’ve described the pros and cons of getting a mortgage that has an offset facility. It’s a fairly simple idea that has saved some borrowers tens of thousands of dollars and several years off their home loans.
Offset basics
A quick refresher: An offset account is a transaction account connected to your mortgage. Any money in the account is seen by your lender as money already paid on your mortgage. You have access to the whole balance in your offset account whenever you want, but while it’s there, it’ll lower the amount of interest you pay.
Is an offset loan right for you? explains offset accounts in more detail. Read it first if you want a complete overview of the pros and cons.
Offset. Tick. What now?
Aussies love offsets. Numbers at the end of 2023 showed we have a total of more than $250 billion in offset accounts. And while almost everyone also uses these accounts for day-to-day transactions, they’re still taking advantage of lower interest payments.
Over the past 12 months, a huge number of mortgage holders rolled off their low fixed-rate loans (which don’t offer offset accounts) onto variable rate loans. In doing so, a high percentage of them now have loans with linked offset accounts.
So whether you’ve had offset for years or are new to the idea, here are some clever ways to make the most of offset, pay less interest, and shorten the life of your home loan.
1. Save!
Although it may not sound very thrilling, packing as much money into your offset as possible is one of the best methods to maximise its impact. Monitor your spending and aim to maintain or slightly increase your offset account balance each month.
If unexpected expenses drag you back a bit, don’t worry. Give your balance time to accumulate. You’ll reduce the length of your loan and pay off your debt sooner, while paying far less interest overall. Your home loan is likely to last many years. The earlier you can boost your savings, the longer your offset facility has to perform its magic.
2. Pay direct
Make sure all of your regular income is paid directly to your offset account. The higher your balance, the better off you’ll be. Getting paid directly into offset, rather than manually transferring it if you remember, guarantees the highest balance possible.
If you have a healthy balance, offsets can also save you at tax time. Interest earned on accounts are considered taxable income by the ATO. Rather than being paid interest, like a regular savings account, offsets reduce your repayments instead. Lower repayments. Less tax.
3. Live on your credit card
This is the most important and easiest way to get offset working harder for you. But it does require a bit of discipline. Here’s how it works:
Put all day-to-day expenses (groceries, entertainment, petrol, bills, car insurance, gifts … everything) on your credit card. You are using the bank’s money to live, while your offset savings are lowering your loan amount and interest payable.
Then – and this is the important part – pay off your card before you have to pay interest. There are plenty of credit cards in the market offering interest free periods of 55 days or more. Pay the required amount just before interest kicks in and you’ll be well on your way to knocking years and dollars off your home loan. Check out lenders with linked home loans, offset accounts and credit cards. They usually offer the ability to set these transactions up automatically.
4. Double check the numbers
This final tip takes a bit more work. Many home loans with offset accounts attract a higher interest rate that basic “no-frills” loans. If you’re never going to have funds in your offset, you’ll likely be worse off. There’ll be no loan savings, and you’ll be paying a higher rate than you would on a simpler loan. Running the numbers based on how much you realistically think you can have in your offset account will show you whether offsets are for you.
5. Talk to a broker
Is an offset loan right for you? Are you making the most of your current home loan?
Talk to a Mortgage Broker Melbourne expert. Our service is free for you: we’ll discuss your current situation and review your income, saving and spending habits. With hundreds and hundreds of loans on offer in the Australian market, our job is to match you with the best loan. Let us run the numbers and do the legwork for you.
If you go ahead and take up a new or refinanced loan with us, we receive a commission from your lender. So you never pay us for anything, although the typical lender costs will apply.
Find the best loan. Contact us.
Marc has been a professional lender for 28 years. After beginning his career in 1990 with a UK Building Society, he moved to Australia where he held several different retail banking roles. In 1999 it became clear to him that a mortgage broker would eventually become an obvious choice for someone looking for a home loan so he took the plunge and became an independent broker. He hasn’t looked back since!