February 07, 2014
I’m sure you’ve searched the internet, reading all sorts of in-depth descriptions and precise calculations about what an offset account is and how it works. Well the truth of the matter is there are many different ways to make your offset account work for you.
The diagram to the left demonstrates the simple way offset accounts are used to help reduce the amount of interest you are charged on your home loan.
The diagram shows that without an offset account, interest is charged on the full amount that you have left owing on your mortgage, which in this example is $400,000. If your interest rate were 5.00% then the interest you would be charged for the year on an interest only loan would be $20,000.
If you have an offset account linked to your mortgage the interest will be charged on the amount you owe on your home loan minus any funds you have in the offset account. In this example interest would be charged on $400,000 minus the $30,000 in your offset account, meaning that interest is only charged on $370,000. If your interest rate were 5.00%, the interest charged for the year on an interest only loan would be $18,500.
Over the life of a 20 – 30 year home loan these savings can really add up, and the extra bonus is that paying less in interest costs means that you have the ability to put that extra money back into your loan as extra repayments, allowing you to repay your loan sooner.
The Finer Details
- The offset account we have discussed above is what’s known as a 100% offset account, meaning that 100% of the savings in the offset account count towards reducing your interest. These 100% offset accounts are generally only available with variable rate home loans and only a limited number of smaller lenders offer this type of offset with fixed rate loans.
- Generally with a fixed rate loan there will either be no option to have an offset or the offset account will be a reduced percentage, e.g. 40%. This means that only 40% of your savings in the offset account would be used to determine the interest payable.
- While the offset account is a powerful tool to be used in reducing the interest you might pay, you need to be wary of the fees associated with operating the offset account. These fees vary from lender to lender and can range from a minimal monthly account keeping fee, to a larger set up fee for establishing the account.
- You can only establish an offset account with the same lender that you hold your home loan with, and as the loan contracts vary depending on the home loan product you have, you may or may not be able to establish an offset account under your current agreement.
Really Making it Work
Using an offset account can be a great way to help you reduce the interest on your home loan, and with a little knowledge and the correct structure you can really take advantage of this often misunderstood product.
Strategies such as having all of your income paid into the account, and using the account to hold all of your savings, means that you are able to make the most out of the offset account given the funds that are available.
It is helping people understand the benefits of features such as the offset account, and seeing people utilize them for their own gain, that really drives us to inform people and ensure that their current home loan is the most appropriate loan for them.
If you would like to know more about offset accounts, or any other strategies please feel free to contact Peter Hale on 0402 252 150, or feel free to Contact Us Today to Book an Appointment.