How to save mortgage interest by using an offset account
Many savvy borrowers have home loans with an attached offset account. This simple strategy can mean big savings over the life of a loan, reducing interest payments and even tax. Here’s how it can work for you.
Offset loans explained
The idea of an offset account is as brilliant as it is simple. An offset account is just like a regular savings account, except it is attached to a home loan (usually a variable rate loan). When this offset account has funds in it, that balance is subtracted from your loan balance.
For example, if your loan is sitting at $500,000 and you have $50,000 saved in the offset account, then your interest payments are calculated on a loan of $450,000. In this example, and with a 5% interest rate, you’d save $268 a month on interest repayments while paying the actual loan off at the same pace. Pretty good.
That monthly saving turns into a significant amount over the life of a typical 25 or 30-year home loan.
Offset versus savings accounts
One of the main differences between an offset account and a regular savings account is that you won’t earn any interest on an offset account. But lenders tend to pay much smaller amounts of interest than they charge on home loans, so you’ll almost always be better off with an offset account.Offset loans come with ATM cards, so there’s no disadvantages in terms of access to money.
Plus, you might not have to pay tax on interest earned, as you would on a regular savings account. Check details with your accountant; it may only be a small saving, but every little bit helps.
Making the most of your offset loan account
The best way to get maximum advantage out of your offset account is too put as much money in as you can: The higher the balance, the less interest you pay on your home loan. As with a regular saving account, you can (and probably should) have any income paid into it.
If you’re a good saver and hate paying interest on your credit card, you can try to take advantage of having a linked credit card too. Savvy savers load up their credit cards with day-to-day expenses, keeping their offset balance as high as possible. Just after pay day, they then pay off the card, meaning there’s always as much as possible in the offset account balance.
Of course, if you don’t pay your credit card off every time before interest is due on it, you’ll end up worse off.
Talk to your broker
If you’ve got a pretty good history of saving, it’s well worth looking into the advantages of getting a home loan with an offset account attached. Contact Us to chat about offset options, and reap the savings benefits of paying less in interest every month.
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!