Offset facility is one of the more common features offered with standard variable home loans. John Kennedy of Mortgage Choice in Mudgeeraba looks at how this feature makes your savings work for you.
The goal of an offset facility is to have your positive savings work to reduce your negative home loan debt.
The net result is you own your home sooner.
When you take out a home loan with an offset facility a savings account is set up and linked to your loan. The saving account works the same way as a normal savings account in that you can deposit and withdraw money as you want. This includes having your wages paid in and your direct debits taken out as well as one off transactions.
The daily total of your savings account is subtracted from the principal amount of your home loan. The interest you are required to pay on your home loan is calculated on this lower amount. At the end of each month the lender tallies these totals and charges them to your loan.
Everyone of your dollars count!
For example if you had $10 000 in your linked savings account and your home loan was $400 000 then your interest is calculated on $390 000. If you had $12 000 in your savings with this same loan your interest on that day would be calculated on $388 000.
A great little tip…
If you are disciplined with your finances, try and make most of your purchases with your credit card. By taking advantage of the interest free days on your credit card you allow more money to sit in your savings account. You must however pay the full amount off your credit card at the end of the month to ensure you avoid paying high credit card interest.
What is the catch…?
It is hard to find one at the moment with the current low rates on savings accounts.
The major difference is you earn no interest on your linked savings account.
However in most cases the interest rate on your home loan is higher than the interest rate on a savings account.
So in affect, you will actually be saving money by paying less interest.
Another factor to consider is the Australian Tax Office (ATO) requires you to pay tax on interest earned but not on money you save by paying less interest.
Each lender has different fees ranging from $0 -$395(with a professional package, which comes with lower interest rates) on the offset feature and on the saving account and all these need to be considered.
Let our Mortgage brokers do the number crunching for you.
Drop in and for a chat to our office conviently located in Mudgeeraba, Gold Coast or give us a call on 5559 2563.