Mortgage offset accounts in a nutshell

Mozo

Monday 04 February 2013

Offset accounts may sound like monotonous financial jargon but if you’re in the market for a new home loan, don’t overlook this tasty little tidbit. You could free yourself from your home loan years earlier and save thousands of dollars in the process.

An offset account is similar to a regular transaction bank account, with the difference being that it is linked to a variable interest rate home loan. The funds in the account are offset daily against the outstanding balance of your home loan, doing a marvelous job of reducing the amount of interest you have to pay and shortening your loan’s life span.
A working explanation of an offset account looks like this: A customer with a $300,000 home loan over 25 years, with an interest rate of 6%, would pay approximately $279,871 in interest. But if the customer had an offset account linked to the home loan for the entire term with a constant balance of $10,000 in it, they would pay the loan off in 23 years and 4 months and pay just approximately $247,512 in interest. So by offsetting the interest owing, this customer knocked 1.67 years off the term of their home loan and saved a walloping $32,359 on interest.

How to get the best from an offset account.

The above explains an offset account in a nutshell but how can a thrifty Mozonian get the most out of this feature? For that we asked Mozo’s expert Home Loan Negotiator, Dirk Hofman, for some insightful tips and tricks.

With interest being calculated daily, it pays off to keep your balance in your offset as high as possible. One way of doing this according to Dirk, is to have your wages or salary paid straight into your offset account. This way your income will instantly reduce the interest on your repayments. “When choosing this option, look for a 100% offset account with the least maintenance fees and charges.”

If the account is linked to a debit or credit card, it will make getting access to your money as easy as a regular transaction account, adding no extra hassle to your day to day banking, Dirk advised.

So why not just slip your savings into a high interest savings account instead?  Generally the amount you save on interest with an offset account will be higher than the interest earned in a savings account. “Any interest you earn on a savings account is taxable,” says Dirk. “Whereas the tax man won’t be asking for any of the savings you make on reduced home loan repayments.”

Are there any cons to an offset account?

While there can be a lot of benefits with an offset account, borrowers need to be mindful of some catches. Some lenders will apply fees for having an offset account or even trickier, they charge you a higher interest rate on your home loan, potentially canceling out any savings you make from your offsets, making it more worthwhile to stick with a low rate home loan with no offset account at all. The simple way  to work out whether an offset account is a good option is to use a home loan comparison calculator and check the difference between the rates compared with what you would expect to have in your offset account.

Home loan tips