Switch on to offsets
With interest rates at an historical low, now could be the time to make the most of your disposable income and pay off your mortgage sooner with an offset savings account.
Offset accounts are not new but nearly half of Australian mortgage holders are unsure what they are and could be missing out on big benefits(1).
An offset account is a savings account attached to your home loan. Instead of earning interest on your savings, the amount in your offset account is deducted from the principal owing on your mortgage, which may reduce how much interest you pay.
Let’s say you take out a $250,000 mortgage and sock $20,000 away in an offset savings account. The $20,000 is offset against your loan, so you only pay interest on the $230,000 difference. The more you accumulate in your offset account, the more you save on interest payments. This doesn’t mean reduced repayments, but it does mean more of your repayment goes towards the principal owed, helping you pay off your mortgage faster.
Here’s how the savings work, using our above scenario with an interest rate of five percent. If you have $20,000 in your savings account at the outset and maintain that amount in your offset account over the life of a 25-year loan, you will save $21,671 and shave two years and six months off your loan.
Offset accounts should come with all the usual benefits of a savings account, such as access to online banking, EFTPOS and ATMs.
Making the most of an offset account
Offset accounts work best for savvy savers – those who have several thousand dollars in savings to start, consistently live within their means and can make regular deposits.
Have your wages deposited directly into your offset account to maximise your savings potential.
Give your offset savings a boost with any employment bonuses or tax returns.
If you land a pay rise, try to save the extra funds each month to really get ahead.
Make sure you take out a 100 per cent offset account, where the interest rate on your savings matches the interest rate paid on your loan. If opting for a partial offset, do your maths to make sure it is the best financial option – you may be better off making lump sum payments into your loan.
Don’t get complacent once your savings pile up. If tempted to stop saving or spend your nest egg, deposit your savings stash directly into your loan and set yourself a new savings target in your offset account to continue to reduce the life of your mortgage.
Some lenders do not offer offset accounts on fixed rate home loans.
Check for any conditions, such as a minimal savings amount before the offset is triggered.
Some offset accounts attract a higher interest rate or higher fees – do your maths to ensure you actually save with the offset facility.
Ask your broker to help assess if you will benefit from an offset account and to find the right facility for your situation.
Make sure you read all of the terms and conditions of an offset account so that you are aware of how the facility works and all associated fees.
- Reduce the interest calculated on your loan with every deposit into your offset account.
- The convenience of your loan and savings in one place, which can also save you bank fees.
- With no interest earnings on your savings, you can also save on tax.
- You still have access to your savings any time with your offset account.
For more information about the different loan structures and how they can help you get ahead, contact Dave Caffarelli on 0411 755 577 or 1300 187 894.
This article first appeared in the AFG Haven - Summer edition newsletter of Dave Caffarelli from PEB Finance, Australian Credit Licence Number 389510.
Disclaimer: Any advice contained in this blog is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this edition is correct as of the date of publication and is subject to change.
PEB Property Group is a complete financial planning advisory service for Perth families. Offices are located in Inglewood and Willetton, Perth, Western Australia and offer - Financial Planning · Finance Broking · Property Management · Real Estate Sales · Property Investment · Development.
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