December 19, 2013
A home loan offset account could potentially save you thousands of dollars in interest repayments over the course of a home loan’s lifespan and take years off the loan’s duration.
But how do offset accounts work and what should you be aware of before adding this feature you’re your home loan?
How do home loan offsets work?
Home loan offset accounts allow you to use the money you already have in your savings account to reduce the amount of interest you’re paying on your home loan.
For example: if you have a mortgage balance of $500,000 and an interest rate of 5% per annum, you’ll pay $25,000 in interest that year. Let’s say that you’ve also got a savings account with $100,000 in it. Instead of your interest being calculated on the full amount, your savings will deduct your total from $500,000 to $400,000 (your full mortgage balance minus the $100,000 you have in savings) leaving you with a $5,000 reduction in interest and just $20,000 extra to pay for the year. That’s nothing to sneeze at! Depending on your home loan rate, you may save even more. Over the life of a 20-30 year loan, even just $10,000 in savings can reduce the loan by years and around $50,000 in payable interest.
When to use a home loan offset
Do you have a holiday fund? Perhaps you’re saving for a new car? Any lump sum of money you have that is sitting idle in a bank account can be used to help bring down your interest payments. Even your monthly paycheck can be deposited into your offset account and be helping accrue interest as you draw out sums as required during the month. Even relatively small amounts of money can still add up to thousands of dollars over the course of a mortgage lifetime.
Things to be aware of
You will have to have your offset account set up at the same institution that you have your home loan with. Make sure your offset account is a ‘100% offset’ variety as anything less won’t enable the full power of your savings to be utilised. There may also be stipulations on which loans are permitted with which mortgage repayment structure you’ve signed on to. For more information, it’s best to talk with your provider.
Home Loan offsets are a potentially powerful means of reducing the length of time and amount of interest payable on your mortgage. With sensible planning and money storage management, you can set yourself up on a fast track to full home ownership.
To learn more about what home loan offset accounts are available, or if this particular savings setup is right for you, get in touch with our friendly representative and have them help you work towards financial freedom.