An offset account is like the sleeping giant of home loan lending that many people don’t know enough about. Using a well-structured offset account can save you tens of thousands in loan interest and help you pay off your home loan many years earlier. Sounds good, right? So, let’s explore exactly what an offset account actually is, and how it can benefit you.
What is an Offset Account?
An offset account might sound like financial jargon, but in simple terms, it’s just another transaction savings account that is linked to your eligible loan account. But not all offset accounts are the same, and there are two main types: 100% offset and partial offset. 100% offset accounts are the most beneficial in reducing the amount of interest paid on your home loan while a partial offset only reduces the amount of interest paid by a smaller portion.
An easy way of understanding offset accounts is to think of it like this: the more money you have in a linked offset account, the less interest you’ll need to pay on your overall loan.
How Does It Work?
Any funds kept in in your offset account are offset against the amount left owing on your loan, and you are only required to pay the interest on that remaining amount. So, hypothetically, if you have a mortgage of $150,000 and you put $20,000 of your money into an offset account, this means you’ll only pay interest on $130,000 instead of the full $150,000 because the interest is charged on the remaining balance once your offset funds are deducted.
How Can It Benefit You?
Opening an offset account can help you save thousands in interest charges and pay your loan off years sooner. It’s best for those who know they can maintain a decent amount of savings in that offset account, and because interest on a home loan is calculated daily, if you’re receiving a 100% offset then your home loan interest can be reduced remarkably every day.
What’s more, any funds in an offset account are not locked in there. You can access them whenever you need, just like a regular transaction account, but it’s best to ensure there’s always a good amount in there in order to get the best interest repayment reduction.
Offset accounts may not be available depending on which bank you’re with and the type of loan you have. Generally, a normal variable rate loan does not come with an offset, so it’s best to specifically ask for a loan with a 100% offset account. In fact, some lenders offer multiple offset accounts and a couple of specialist banks will even give you full offset when your loan is on a fixed rate. Together these added offset features can significantly reduce the cost and the term of the loan so you are saving lots of money and owning your home much sooner. To see how fully featured and well-structured loans with multiple offsets on fixed and variable rates will benefit you and which banks offer them, contact a savvy finance broker – it’s a great way to manage your finances to ensure you’re closer to achieving your dream of financial freedom.