Many of us struggle to understand the financial jargon used in today's society, which can lead to making poor financial decisions. Coming from an educational background as a high school Maths teacher, I soon realised that not everyone has a good understanding of financial terms such as offset, equity, LVR, and many other terms which are extremely important when navigating your way around the financial world. Like many of my ex-students, adults also, are often too embarrassed to ask questions, for the fear of looking silly. But as I always said to my students, "there is no such thing as a silly question, because if no one has explained it to you before, how are you meant to know". So here entails part one of a series of blogs to help everyday Australians like yourself become more informed, so that you too can have your finances working for you in the best possible way.
Part one of this series begins with offset accounts. What are they? And what do they do?
Well simply put, an offset account is like an everyday transaction account or savings account, however, it has the added bonus of being linked to your home loan account. Why is this good you may ask? Well, the money that you have saved in your offset account, actually offsets the amount of interest you pay on your home loan.
Let me explain further with a real life example. Let's say that you have borrowed $400,000 and you have that sitting in a home loan account, but you have an offset account linked to that home loan account with $100,000 in savings sitting in there. What that means is that instead of paying interest on $400,000 that you have borrowed, you now minus the $100,000 (as it offsets the home loan amount), so that you only pay interest on $300,000. This means that at today's interest rates of roughly 4%, you would save $4000 per year.
So, in today’s financial world, if you have a home loan, it really does pay to have an offset account, where you can park all your savings and earn 4% and upwards on the money sitting in that account. Many clients also have savings accounts for their kids, holidays, cars and other miscellaneous reasons they maybe saving for. Many of our lenders that Mortgage Choice have access to, offer multiple offset accounts packaged into one home loan. This means that you could have an offset account for the kids, one for holidays, and so on. This then means all the money that is in these accounts are then deducted off the home loan amount, so that when your daily interest is calculated for the for the month, it is calculated on the new lower debt amount, which in turn, lowers your monthly interest repayments.
I hope this blog has helped you understand an offset account and its purpose, and if you have any other financial needs or further questions, please be sure to give us a call at Mortgage Choice in Blaxland & Penrith.