What is an offset account and how will it help to pay off your mortgage sooner?

January 14, 2014
Soula O'Meara

An offset account is a savings account linked to your home loan. Instead of the bank paying you interest into your savings you save interest on your home loan instead.

They are generally attached to a variable loan however there are some smaller finance companies who allow a 100% offset account on a fixed rate loan and others that will allow a portion of your savings to be offset.

So how does it work?

If you have a loan of $400,000 and offset account balance of $10,000, the bank would calculate your interest on your home loan balance at $390,000.

If your interest rate is 5% this would save you $500 per year on your loan.

Although this does not seem like much, it would save you $33,000 and 1 year 4 months of the term of your loan, based on a 30 year loan term.

How can I increase my savings?

A good way to maximise your interest savings is to use your credit card during the month, have your salaries paid into the offset account which increases your daily balance and then pay the credit card in full when it is due.

This way you avoid paying interest on your credit card and save more on your loan.

You must make sure you pay the required payment on the credit card to avoid it's interest otherwise it will cost you more than your loan savings.

Its a win win situation.

The benefit is that you save interest and years off your loan. Your savings are tax free. Increase your equity sooner – which could help you buy your next home and start to create wealth for your future.

The key is to save as much as you can because every little bit helps.

Posted in: Tips

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