Mortgage Offset Account
With An Offset Account?
With this in mind, it’s a good idea to start researching different types of mortgages that are available. After all, one size hardly fits all. If you’re an excellent saver and have no concerns about meeting your monthly repayments, then it could be a worthwhile exercise to look into a variable rate home loan which has a mortgage offset account attached to it as opposed to opting for a fixed rate mortgage.
Low interest rates allow you to take full advantage of the bank’s base-rate, and this flexibility means that you’re not tied into a single inflexible product that may carry early repayment charges.
Let’s compare this flexibility with a 3-5 years fixed home loan and the difference is clear. Your lender may give you the peace of mind of knowing what your monthly repayments will be, but you may hit the wall if you wish to clear the balance quicker by making additional repayments.
With offset accounts, you can make full use of the extra repayment facilities. Depending on what your Lender offers, you could stay ahead of future hikes in interest rates by creating your own in-house advantage.
A home loan offset account works slightly differently and links your home loan to your transaction account. So if your account has a balance of $20,000 sitting in it, this will effectively offset the $300,000 mortgage balance. This can result in substantial savings as the initial interest is charged on the difference of $280,000.
The real benefit of the home loan offset account lies in the possibility of reducing your overall mortgage term. While it takes a bit of pro-active management of personal finances, it can potentially keep thousands of dollars from evaporating in your pocket.
It’s difficult to predict what the future may bring, it could be an unforeseen redundancy for example, which could quickly turn home loan repayments into a source of sleepless nights. Even an increase in interest rates can leave many home-owners in a dire situation.
There’s a dual benefit to keeping a well managed offset account. Every month, surplus cash flow can be automatically retained within this account which operates exactly like any standard savings or chequing account. As such, you can make electronic transfers and use a regular ATM bank card for any payments and withdrawals from the home loan offset account. Opting for this type of Mortgage account not only saves you overall interest but it also builds a nest-egg by providing emergency funds that can smooth out potential gaps in future earnings.
To Look Out For
Double check that the interest on your mortgage matches the interest that you’re offered. The benefit lies in the fact that your offset account earns interest which is offset, entirely tax-free against your mortgage interest. While the matched interest option frequently goes unnoticed, it can truly offer an additional boost to your savings.
With Offset Accounts
Within a home loan offset account the balance is also tracked on a daily basis. This means that at the end of the month any interest savings that you accumulate is automatically deducted from your monthly interest bill.
Finally, by matching the interest on your account against the interest offered on your mortgage, the effect of compounding interest slowly starts to dissipate, which gives you a tax efficient treatment. The result of this for example is that the interest saved on your $20,000 remains tax-free as it is not recognized by the Tax Office as taxable income.
The future is also filled with uncertainties. If you’re a good saver you have the opportunity to create peace of mind by creating a nest egg of funds in your offset account. On the other hand, there may be a number of drawbacks if a lower cash balance is used to offset the home loan. The annual costs of running this type of mortgage account can quickly exceed the beneficial tax treatment that you may receive.
It’s not uncommon for offset accounts to cost between $120 and $398 per year, and this may not be an ideal option if you maintain an average account balance of $1,000. If this is the case, it may be more beneficial to opt for a low interest fixed rate mortgage product.
If you feel unsure about your options, then please remember that every circumstance is completely unique and that you can get the much-needed clarity by speaking with your bank or with an Independent Mortgage Adviser about a mortgage offset account.
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