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For those who have worked and scraped to save a mortgage deposit, there is a strong instinct to find the best value loan, and repay it in the most efficient way possible. If this is you, I suggest you take a look at a product called the offset account loan. When they’re used properly they can save you thousands of dollars and accelerate the paying-down of the mortgage.

An offset account is a transaction account directly linked to your mortgage account. The balance of funds held in the offset account serves to reduce the balance of your loan account for the purposes of calculating interest. These calculations are carried out on a daily basis, so each day you have a credit balance in your offset account, it is saving you interest. Here is an example. If your mortgage balance was $300,000, and you put a $5000 tax refund into the offset account, interest would only be charged on $295,000 for the period the offset account is maintained at a $5000 balance.

The longer you can keep the balance high in your offset account, the lower you keep the interest bill and, therefore, more of your money is paying-down principal rather than interest. This is how you speed up the repayment of the loan.

It can work this way: all income goes into the offset account and fixed costs (mortgage, power, phone, internet, gas, car finance) are direct-debited from the offset account automatically. For those without spending discipline, weekly spending money (including grocery budget) can be deposited into separate bank accounts, and an allocated amount goes into debt reduction or investments, including super. The trick is to never have an ATM or credit card attached to the offset account, especially if you are likely to take yourself on a spending spree. Have one for your weekly spending account, but not the offset.

An offset account is a do-it-yourself tool because you can set it up yourself, fine-tune it as you go and use it as both a budgeting and wealth-building system. It’s worth noting that loans with an offset account are often marginally more expensive than your typical basic loan. However, by adopting strategies for aggressively paying down home loan debt, you can potentially be better off in the long term.

If you have the discipline and the focus to make this work – and many Australians do – you’ll find you can better control your money and you can make your income work harder for you. You’re also potentially ahead tax-wise because the money you save on paying less interest is tax-free, whereas if you put the $5000 tax refund in a savings account you would potentially have to pay tax on the earnings.

Offset account mortgages are not a magic bullet and they don’t suit everyone. But for focused, disciplined people who want to be smart about their mortgage and finances, this is something worth investigating.


Posted by Mark Bouris – Sydney Morning Hearld on 24th July, 2014