What’s The Value Of A
Mortgage Offset Account?
Can You Create Financial Security With An Offset Account?
While the economic climate may not lend itself to accumulating substantial savings, there couldn’t be a better time to make savings with your mortgage.
If you’re currently on a variable rate, is it worth considering switching to a 3 year fixed home loan that will see you back well below a 5% interest rate?
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.
How Do Offset
If you have a total home loan balance of say $300,000 – your monthly repayments in a traditional mortgage product will depend upon the interest rate and the type of product that you have selected.
Here the balance consists of interest and some principal amount, and over the years more of your contracted payment amount goes towards the principal amount of the debt.
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.
Mortgage Offset Account Features
To Look Out For
If you believe that the offset account matches your needs, then keep in mind the following benefits when you pick your Lender.
The best deal offers no limits on your balance and allows you to fully offset the surplus monies against the balance of your home loan.
By having this option, you could decide to migrate any other bank accounts you may have and cut costs on any monthly account fees that you may have been incurring.
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.
A Run Down Of Offset
This type of Mortgage account bears an identical structure to any standard account.
By having a regular Automatic Teller Machine (ATM) bank card you can carry out all electronic transactions and make withdrawals from the usual ATMs.
With no access costs, you can enjoy the flexibility of depositing your salary knowing that you are entitled to an unlimited amount of withdrawals.
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.
Would A Home Loan Offset
Account Be Right For You?
An offset mortgage can indeed be the ideal solution for home-owners that have considerable levels of savings that can be offset against the mortgage balance.
Alternatively, if you have an above average to a high level of income, you could choose to take full advantage of the unlimited balance facility.
By making higher repayments the outstanding mortgage term would be reduced and you could save thousands off the interest that you would’ve normally incurred.
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.