Are you paying off a mortgage but also have some money saved? There is a way that you can use your savings to help save interest on your home loan. But if it’s not used wisely it can end up costing you more.
Save yourself time and money
An offset account is a transaction account linked to your mortgage. The money in your transaction account is deducted (offset) against the balance of your loan, so you only have to pay interest on the difference. When used in the right way an offset account can save you thousands of dollars and cut years off your home loan.
For instance, say you had a home loan valued at $300,000 and your offset account had a balance of $10,000, you would only pay interest on $290,000. If you compared the total interest you would pay over 25 years on $290,000 to a loan of $300,000, you could save approximately $44,430 in interest and reduce the term of your loan by one year and eight months (using a rate of 7.09 percent).
Mortgage offset accounts only work while there is money in the linked account. In order to make this facility more effective, organise with your employer to have your income deposited into this account and try to increase the balance throughout the term of the loan. Then while your savings rise you pay less and less in interest.
Don’t be alarmed by storing your cash, because you can still access the money in your offset account when you need it to pay bills and go shopping. Just remember to top up the account when you can to help reduce the amount you pay in interest.
What to be aware of
While offset accounts can help you save money, if you don’t have much cash to offset your loan, you risk paying a higher interest rate and more fees compared to what you could without the offset feature attached.
Also, in order to setup an offset account, some lenders require a minimum and maximum balance. So check with your financial institution before applying, to ensure you are eligible.
If you think a home loan with an offset facility is for you, check online to see which low-rate mortgages offer this feature and start saving. Remember, the more money you have to offset the more you save.