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Among the many ways to save on mortgage repayments, an offset account is an easy and effective approach. Here’s a quick guide on what an offset account is and some best practices around its use.
What is an offset account?
An offset account is an account connected to your mortgage. With the help of an offset account, you pay interest only on the difference between the amount in your account and the amount you owe your lender. For a more precise understanding, consider this example. Let’s say you have $10,000 in your offset account and have an outstanding loan amount of $400,000. You now only pay interest on the difference, i.e., 390,000 instead of $400,000.
Best practices associated with an offset account are based on the basic principle of ensuring a good balance for the longest period possible. While this sounds like quite a mouthful, it’s not very challenging with these steps.
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#1 Deposit all your earnings into your offset account
Whether you are salaried or self-employed, ensure that your earnings are deposited straight into your offset account. This way, your salary or earnings will work towards offsetting the interest you pay on your mortgage.
#2 Put back any windfall gains
Any significant monetary benefit in the form of a bonus, a sudden inheritance or a windfall win should once again hit your offset account. Work towards letting it sit there for a while before deciding on what you intend these funds for. Also, keep in mind that if you want to put these funds into long-term savings that earn you interest, it is better to let them stay in your offset account. This is because any interest you earn on long-term saving deposits will attract income tax.
#3 Use a credit card with your offset account
As mentioned earlier, the longer you let funds stay in your offset account, the more you save on interest payments. Most credit cards have a repayment period of 45 days. Using a credit card for daily expenses instead of money in your offset account, you could offset the interest earned on the 45-day period of your card. However, be mindful of credit card use and prevent it from becoming a means of debt accumulation by paying the full balance due on time. By doing so, not only would you have earned interest on funds in your offset account, but you can also enjoy benefits associated with credit card points.
#4 Check for Hidden Fees and Costs
While opting for an offset account, ensure the following:
- No fees on withdrawals
- No balance limitations
- 100% offset account as opposed to partial one (that offsets a percentage of interest)
- Easy and full access to the funds in your account
Finding a lender that provides the right offset account can get challenging. Rely on the professional guidance of a mortgage broker. A mortgage broker is usually paid by the lender upon settlement of a loan making his/her services free for a borrower. In addition to scoping the market to finding you the right home loan match, a broker will also handle all the loan paperwork should you apply for one.
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The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.