If you have a variable rate home loan, it’s likely you’ll have the option of 100% offset.
Let’s look into how this works and what the advantages are – for you and your mortgage.
What is an offset account?
100% offset links an everyday savings account to your variable rate home loan.
It uses the money in that account to offset your loan balance.
The more money you have in the account, the less interest you pay on your home loan.
Think about a standard home loan.
You’re paying interest on the total amount still owing.
But with offset, you’re charged interest on your home loan balance minus the amount in your linked everyday account.
Say you’ve taken out a 25-year mortgage for $320,000.
Now, suppose you pay an average interest rate of 7.22%.
We’re going to assume you have, on average, $10,000 sitting in your linked account (roughly what you’d hope to have as a ‘buffer’).
Over the life of your loan, you’d save $46,319.
Effectively, you end up paying off your loan sooner – your 25-year mortgage ending 20 months early.
Usually your home loan interest is worked out each day, calculated on the balance of your loan (and then charged monthly).
If you’re an offset customer, this means every dollar you have in your linked bank account saves you interest every day that it’s there.
You don’t need to be rich.
Even maintaining a balance of a few hundred dollars can save thousands in interest.
Since every dollar (every day) saves you interest, it makes sense to keep your balance as high as possible – for as long as you can.
Here are two simple ways you can make offset work better for you.
Have your salary or wages paid into your offset
If your pay goes directly into your offset account, this money immediately reduces the interest you pay on your home loan.
Even if it’s only in there for a couple of days, it adds up (and you can still take money out as usual).
To do this, you really need to be a disciplined spender and know how much your monthly expenses are.
Here’s how it works.
Keep enough money in your account for your expenses (e.g. groceries and bills), but use your credit card to pay for them instead.
This lets you keep the maximum amount in your account, offsetting interest.
At the end of the month, transfer the money you’ve set aside in your account and pay off your credit card balance in full.
This part is key to the strategy, as you don’t want to accumulate credit card interest.
If you have a fixed rate home loan, your options may be more limited.
At the end of your fixed rate period, your loan will shift onto a variable interest rate, or you’ll have the option of splitting it into fixed and variable parts.
When this happens, you can consider getting an offset account
Usually offset is the most convenient way to save yourself money on your home loan, but there are some exceptions.
Another way to reduce the interest on your variable rate home loan is to make extra repayments.
There’s no difference in the money that you will save compared to using your offset, but there are some instances where making extra repayments to reduce your home loan balance can be a better option for you.
• You want to increase the equity in your home
• You want to reduce your loan repayments
• You can redraw when you’re ahead on payments and you’d rather transfer the savings into your home loan where it is out of sight and out of mind.
Want to know more?
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Friday, 8 March 2019