Mortgage offset accounts: Making your money work for you.
Home buyers usually focus on the here and now, not the distant future. Rather than the size of their loan balance in 10 or 20 years, they are more likely to think about how much they can borrow and the kind of house they can afford.
But smart borrowers know the future matters. The years roll around and it’s always better to pay off a mortgage before its term and pay less interest to the bank.
The good news is that if a mortgage offset account is right for a borrower, it can help them do just that. An offset account can make them a match for their mortgage.
What is a mortgage offset account?
A mortgage account with 100 per cent offset is a fully featured transaction account that sits alongside a home loan. In many ways it acts just like a regular bank account, you’ve probably got at least one at the moment.
However, along with the usual facilities, like ATM access and direct debit, there’s another significant advantage: Any money sitting in the offset account reduces the amount that the bank calculates interest payments against.
That’s right. The loan principal is reduced for the purposes of interest calculation by the amount of money in the offset account, without increasing the repayment amount.
Forget about receiving 0.001% per annum on money in your day-to-day transaction account, save and “earn” interest at your variable rate, for most of our customers this is about 4.20% to 4.50%
How does an offset account work?
An example may make it easier to understand how an offset account works. If a home buyer has a principal of $350,000 outstanding on their mortgage and also has $10,000 in a linked 100 per cent offset account, the bank will only charge them interest on $340,000.
The money they save in interest goes straight into paying down their loan principal, which has the effect of reducing the interest paid over the life of the loan, as well as the overall loan term. Less money paid off faster.
When borrowers realise that banks calculate interest on mortgages daily, offset accounts can be used proactively. For example, getting salary paid into an offset account means the loan principal is in effect reduced by that amount as soon as it is paid.
Savvy borrowers may even choose to use interest-free days on their credit cards to pay for goods and services, so they can keep cash in their offset accounts working for them.
How can Burgundy House help?
As a mortgage broker, we help borrowers apply for and secure appropriate home loans every day, and many will have an accompanying offset account. We will always compare a range of competitive products, and look at loan features like offset accounts so our clients can make informed decisions.
Anyone with a mortgage can choose to have a linked offset account, although it will depend on the loan type and institution. It’s always best to check the offset is 100 per cent.
It’s important to know that offset accounts are usually included as part of fully featured home loans, which might mean you pay more in fees or a higher interest rate. So discussing your financial circumstances with us could be a smart first step.
Game, offset, match
If you’re serious about winning the mortgage game, you need to be aware that having a mortgage offset account could offer you an edge in the long term.
In any sport, a match isn’t won instantly. Points are accumulated over time. With the points scored daily by an offset account, it can be game, offset and match.
For more information contact Matthew today.
This is part one of our “Simple Language Series” – educating our clients to help them get the most out of their finances.