Are you just about to buy your first home and take on your first mortgage?
If the answer is yes, congratulations! Buying a home is a wonderful experience - whether you are buying a place to live in or a place to rent out.
Of course, in order to purchase your first property, you may need to take out a mortgage.
If this is the case, you have no doubt heard words like ‘redraw facility' and ‘offset account' bandied around a lot.
Some of you may be wondering what these home loan features are, whether or not you need them, and how you can use them properly.
One of the most common home loan features is an offset account.
An offset account is a transaction account that is linked to your home loan. All the money held in this account is then used to offset the interest charged on your home loan.
For example, say you have $10,000 in your offset account and you currently owe $500,000 on your home loan. The money in your offset account ensures you only pay interest on your mortgage minus the money in your offset account. In other words, you will be charged interest on a $490,000 loan, rather than a $500,000 loan.
If you have a decent amount of money in your offset account from day one, you could find that it saves you thousands of dollars in interest over the life of your loan.
Which home loan products come with an offset account?
While the benefits associated with offset accounts are clear, it's important to note that this type of home loan feature is synonymous with a ‘professional package home loan' - a home loan that typically comes with an annual fee (that could be as much as $500).
In basic terms, if you do not think you can have a regular sum of money saved in your offset account, then you might not be financially better off with this home loan feature.
To give this some context, let's use the following example:
Say you have a $500,000, 30-year home loan with an interest rate of 4%p.a. Now, if you have $10,000 saved in your offset account from day one and the balance of your offset account never dips below that value, you could save approximately $10,800 in interest over the life of your loan.
Of course, if your offset account comes as part of a ‘professional package' home loan and the fee attached with this type of product is $450 a year, then the cost of this product over 30 years is $13,500.
In other words, the professional package fee will cost you more than the money you save by having $10,000 in your offset account.
In this situation, you would need to have at least $15,000 in your offset account from day one to make this type of home loan feature work for you.
How to get the most out of your offset account
If you do choose to take on a home loan with an offset account, it's imperative you know how to get the most out of this home loan feature. In the first instance, it is always a good idea to, where possible, deposit your income directly into your offset account to maximise your savings. By having all of your money directly deposited into your offset account, you can increase the balance of the account, which will ensure you maximise the value of this particular home loan feature. It is important to note that interest is calculated daily. So, even if you use the offset account as your transactional/spending account, the funds in your account will always offset the interest payable on your home loan – regardless of how much is in there.
Furthermore, instead of having a separate savings account, try saving all of your money in your offset account. If you can't trust yourself with your money and feel the need to lock your savings into a separate account, speak to your lender about the possibility of having two offset accounts. Some lenders will allow you up to 7 offset accounts, the combined balance of which is used to reduce the interest payable on your loan.