One of the most effective tools in your financial arsenal is the humble offset account. If you have one, you are hopefully using it to your best advantage, but if you don’t have an offset, it might be worth considering one. So what are they and how do they work? Glad you asked.
An offset account operates like a normal transactional account, the difference being is that it’s linked to a home or investment loan and the balance “offsets” the loan balance. Therefore you are charged the interest.
For instance, if you owe $300,000 on your home loan and have $20,000 sitting in your offset, the bank calculates your interest charge based off a loan amount of $280,000.
Assuming you use the offset account effectively, the potential savings can be significant. On the above example, over the course of a 30 year loan term at a conservative interest rate of 4.5% you can expect to have your loan paid off almost 3 years earlier. In addition, if you maintain a balance of $20,000 in your account, you can save yourself in excess of $50,000 in interest charges.
Your repayments should stay the same, but the interest component of the repayment will be lower the more you have sitting in the offset. The reduced interest charge means that more will be coming off the principal and therefore the overall loan amount.
Each lender has their own unique policy regarding the amount of offsets available but there are a growing number offering the ability to have multiple accounts. This option is great for those who like to divide their savings for different purposes, such as a holiday account, children’s’ savings or bills.
Not all loan products have the ability to link and offset accounts. Generally speaking the “no frills” or basic loan products do not include offset as well as most fixed rate loans. However, some fixed products may include a “partial” offset, meaning a portion of the account balance will offset the interest.
Absolutely. Savvy offset account users opt to have their salaries paid into the account and let it sit there for as long as possible, using their credit card to pay for all their living expenses for the month. Prior to the end of the month they will then pay off the credit card to avoid the interest charges incurred. As interest is calculated daily, letting as much money as possible hang out in offset means reaping the benefits it offers.
For more tips on how to get the best out of your offset, contact the Blackburne Mortgage Broking Team today!