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Offset Account [How do Offset Accounts Work?] + 4 Tips to Save $$$
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An offset account may help you pay less interest on your home loan. Here’s our guide to mortgage offset accounts and how they work.
What is an offset account?
An offset account is a savings account or transaction account linked to your home loan account. The account’s balance (or a proportion of that balance) is ‘offset’ daily against your home loan balance, and as a result you’re only charged interest on the difference between the total loan balance and the amount offset.
This means the lender charges you less in interest because they are not charging you interest on the full, actual remaining balance of your loan.
Offset accounts may be linked to either a variable rate loan or a fixed rate loan. Some home loans may specify that the offset applies for a fixed term, such as a 100% offset for a year against a 1-year fixed rate loan.
How does an offset account work?
Offset accounts work by offsetting up to 100% of the balance of the linked savings or transaction account against the balance of the linked loan.
In the case of a mortgage offset account, the balance of the account reduces the balance of the mortgage that incurs interest. For example, if you had a loan of $350,000, with $100,000 in a linked 100% offset account and $100,000 repaid, you may only pay interest on $150,000 of your balance.
Types of offset accounts
There are two types of offset accounts:
Balance offset account: These accounts offset the interest payable on the mortgage by the balance of the account. The percentage of the balance that will be offset can range right up to 100%. However, a partial offset account may only offset your mortgage by a portion of the balance, for example, a 50% offset account will only offset the interest bearing portion of your mortgage by 50% of your offset account balance. So the higher the percentage of the offset account, the more you will save in interest on your mortgage.
Interest offset account: These accounts offset the interest payable on your mortgage by the interest earned in the account. However, this could be substantially less than the interest rate of the mortgage. Depending on the interest rates of your mortgage and offset account, these accounts are likely to be significantly less favourable than balance offset accounts, but they are also less common.
Pros and cons of an offset account
First, by having a decent amount of money in your offset account, you might effectively cut years from your home loan and pay thousands of dollars less in interest. You don’t necessarily need a huge amount of spare savings, though – every cent in your offset account is saving you money in interest off your loan, for a 100% offset account.
Secondly, an offset account is simple for most people to manage. You could have your salary deposited into a standard savings account or transaction account every payday, and if it was linked as an offset account to your loan it would automatically save you money on your monthly interest payments.
And thirdly, having an offset account can be an easy way to keep excess funds at hand while still minimising your interest payments on your mortgage, so if your financial situation changes or if something unexpected like a medical emergency were to happen, then you will be able to easily access the money that has been offsetting your mortgage instead of having to redraw on extra repayments you have made on your home loan, which is often limited to minimum amounts and/or come with fees.
Offset accounts can be a great tool for some home owners, particularly with the flexibility they can provide. They can also potentially save you money and cut time off your mortgage.
However, keep in mind you may find yourself either paying an additional fee for a loan with an offset account, or alternatively, you could end up paying a higher interest rate on your mortgage. The financial benefit of a mortgage offset account will depend on a number of factors, such as the interest rate and fees of comparable loans (with or without an offset facility) and how much money you are likely to keep in your account. So, it is important to weigh up your individual circumstances and determine if an offset account is right for you.
How much could you save using an offset account?
An offset account can be a great way to save thousands of dollars in interest on your home loan.
DISCLAIMER:
This video offers no Legal, Financial and Taxation advice, and the information contained is general and does not take into account your personal situation. The Listener acknowledges, consents and agrees to the viewing of the content presented on the Channel is subject to the full Disclaimer (below) and agrees to be unconditionally bound by this Disclaimer.
What is an offset account?
An offset account is a savings account or transaction account linked to your home loan account. The account’s balance (or a proportion of that balance) is ‘offset’ daily against your home loan balance, and as a result you’re only charged interest on the difference between the total loan balance and the amount offset.
This means the lender charges you less in interest because they are not charging you interest on the full, actual remaining balance of your loan.
Offset accounts may be linked to either a variable rate loan or a fixed rate loan. Some home loans may specify that the offset applies for a fixed term, such as a 100% offset for a year against a 1-year fixed rate loan.
How does an offset account work?
Offset accounts work by offsetting up to 100% of the balance of the linked savings or transaction account against the balance of the linked loan.
In the case of a mortgage offset account, the balance of the account reduces the balance of the mortgage that incurs interest. For example, if you had a loan of $350,000, with $100,000 in a linked 100% offset account and $100,000 repaid, you may only pay interest on $150,000 of your balance.
Types of offset accounts
There are two types of offset accounts:
Balance offset account: These accounts offset the interest payable on the mortgage by the balance of the account. The percentage of the balance that will be offset can range right up to 100%. However, a partial offset account may only offset your mortgage by a portion of the balance, for example, a 50% offset account will only offset the interest bearing portion of your mortgage by 50% of your offset account balance. So the higher the percentage of the offset account, the more you will save in interest on your mortgage.
Interest offset account: These accounts offset the interest payable on your mortgage by the interest earned in the account. However, this could be substantially less than the interest rate of the mortgage. Depending on the interest rates of your mortgage and offset account, these accounts are likely to be significantly less favourable than balance offset accounts, but they are also less common.
Pros and cons of an offset account
First, by having a decent amount of money in your offset account, you might effectively cut years from your home loan and pay thousands of dollars less in interest. You don’t necessarily need a huge amount of spare savings, though – every cent in your offset account is saving you money in interest off your loan, for a 100% offset account.
Secondly, an offset account is simple for most people to manage. You could have your salary deposited into a standard savings account or transaction account every payday, and if it was linked as an offset account to your loan it would automatically save you money on your monthly interest payments.
And thirdly, having an offset account can be an easy way to keep excess funds at hand while still minimising your interest payments on your mortgage, so if your financial situation changes or if something unexpected like a medical emergency were to happen, then you will be able to easily access the money that has been offsetting your mortgage instead of having to redraw on extra repayments you have made on your home loan, which is often limited to minimum amounts and/or come with fees.
Offset accounts can be a great tool for some home owners, particularly with the flexibility they can provide. They can also potentially save you money and cut time off your mortgage.
However, keep in mind you may find yourself either paying an additional fee for a loan with an offset account, or alternatively, you could end up paying a higher interest rate on your mortgage. The financial benefit of a mortgage offset account will depend on a number of factors, such as the interest rate and fees of comparable loans (with or without an offset facility) and how much money you are likely to keep in your account. So, it is important to weigh up your individual circumstances and determine if an offset account is right for you.
How much could you save using an offset account?
An offset account can be a great way to save thousands of dollars in interest on your home loan.
DISCLAIMER:
This video offers no Legal, Financial and Taxation advice, and the information contained is general and does not take into account your personal situation. The Listener acknowledges, consents and agrees to the viewing of the content presented on the Channel is subject to the full Disclaimer (below) and agrees to be unconditionally bound by this Disclaimer.
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