What is an offset account?

By Lauren Leisk, Yahoo7 Moneyhound Updated August 7, 2014, 8:00 am

An offset account is one of the most powerful ways to save you hundreds of thousands of dollars over the lifetime of a mortgage.

A ‘100 per cent offset account’ can sound too good to be true.

But these accounts enable you to have every cent of your money working to reduce your mortgage rather than sitting idly in your cheque or savings account.

If you put as much of your spare change as you can into an offset account, and keep it there for as many days as possible each month, your home loan repayments can be reduced as your savings are bringing down the interest incurred and in effect 'offsetting' the cost of the loan.

Related: How refinancing your home loan can save you thousands

How does an offset account work?

Imagine if every dollar you had was linked through your everyday transaction account to offset your mortgage balance. You could be saving interest each day you hold that money in your offset account. Your mortgage will no longer be calculated on your full debt. It becomes calculated on your debt minus any offset funds you have accumulated.

Start with your wage

An offset account can be beneficial even for those who find it hard to save. You can start by sending your wage directly into your chosen account. This way, the money you earn is immediately reducing the interest you pay on your home loan – even if you end up spending some of that money over the cycle of a month.

Say you get paid on the 15th of the month, but your mortgage repayment cycle is on the 28th of each month. You could save the difference in interest on the amount in your account for all the days in between this period every month. In the long term this can add up to thousands.

Related: Big Banks vs Credit Unions: what's the diff and who's cheaper?

Calculate offset account mortgage savings

The savings you can squeeze from an offset account will be different for everyone depending on their savings regime. However, if you had $10,000 sitting in an offset account for the life of a $320,000 loan, you would save around $46,000 and pay off your loan around 18 months sooner (calculated on 7 per cent interest over a 25-year loan).

Why use an offset account

An offset account can help when you are not in a position to pay lump-sum repayments into your loan. You may have savings you are gradually using for renovations, or your savings account might be your annual holiday fund.

Using an offset account is like getting your home loan interest rate as a percentage return on your savings. Depending on your rate, it could return more than the best high interest savings accounts. With interest calculated daily, the longer you can leave money untouched, the better off you’ll be.

Related: How to compare home loans apples for apples

What to look for in an offset account

Check to make sure you can meet the minimum requirements of an offset account. This could save you money on excess fees in the long run. Investigate options where bundling your services with your bank can mean saving on charges.

Moneyhound compares home loans that have an offset account option here, some of them starting from just 4.54% p.a.

Homeowners with savvy money skills and those living between paycheques can both find benefits in offset accounts. When used to their full potential, the long-term savings and shorter mortgage life can be highly rewarding.

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