Most terms of home loans or mortgages in Australia last for 30 years, both for variable rate and fixed-rate mortgages. Thirty years is a long time.
If you are planning to get a home loan but you want to expedite paying off your mortgage, you can do so. One way to do this is to find a home loan that allows you to have an offset account. Your offset account will not only help you pay off your mortgage sooner and with lower interest, but you can also use it for other purposes.
This article helps you familiarise yourself with offset accounts, how they work and how you can use them to cut a few years from your 30-year mortgage.
What Is an Offset Account?
An offset account is an account linked to your home loan or other loan accounts. If you happen to have a current home loan without an offset account, try refinancing. Refinancing home loans will give you the opportunity of choosing a new home loan with an offset account.
You can treat your offset account as your regular transaction account. You can deposit and withdraw from your offset account anytime you want.
What makes it different from a regular transaction account is that instead of earning interest, your fund in your offset account is automatically deducted or ‘offset’ against your home loan, thus its name. This means that instead of paying the interest from your original home loan, you would only need to pay off the interest after your offset account is deducted from your home loan.
Offset accounts can also be used in loans with other purposes, such as property investing, and mortgage refinancing
How Does an Offset Account Work?
To fully understand how an offset account works, here is an example:
Let us say you have a $500,000 balance from your home loan and you have an offset account with a $20,000 fund in it. Instead of charging you the interest rate of $500,000, you will only be charged for $480,000.
Given that interest rates are calculated daily, you are free to deposit and withdraw from your offset account as you want because the funds in your account will always offset the home loan.
How Can I Have an Offset Account?
Not all home loans allow you to have an offset account. With the help of a trusted mortgage broker, you can connect with the best home loan solutions that will allow you to have an offset account you can use to pay off your mortgage.
How Can I Use my Offset Account to Pay Off My Mortgage Sooner?
Using an offset account reduces the amount of your home loan where the interest is paid. Let us take our previous example above and see below how you can use your offset account to pay off your mortgage sooner:
- Loan amount of $500,000.
- The interest rate is 5% per annum.
- The initial loan period is 30 years.
- Offset account fund of $20,000
- Instead of paying $25,000 (5% of 500,000), you will need to pay $24,000 (5% of 480,000).
- You save $1,000 per year.
- For a 30-year loan period, you will save $30,000 on interest.
- $30,000 savings from the interest reduces paying off your mortgage for more than a year (1 year = $25,000)
This example applies only if you have a fixed fund of $20,000 in your offset account. You will save more and deduct more time from the loan period if you continue to deposit more to your offset account.
Your loan repayment remains the same, but a larger portion of it is used to pay off the principal, shortening the life of your loan and lowering the amount of interest paid.
What Are the Other Uses of an Offset Account?
You can use your offset account as your regular transaction account, such as:
- Savings—Using your offset account as your savings account will let you get away with the tax rate and interest rate of a regular savings account.
- Salary—You can receive your salary directly into your offset account to increase your fund.
- Credit card and bill payment—By using your offset account as the two mentioned above, you can also definitely use the fund to pay for your credit cards and other bills. In that way, you can also get away with interest charges on your bills.
How Much Money Can I Put in My Offset Account?
There is no limit on the amount of money you can deposit in your offset account. Technically, the more funds you have in your offset account, the longer time you can keep your account, the better. However, most home loan lenders require a fund of at least $10,000 in the offset account.
How Many Offset Accounts Can I Have?
Some banks and lenders allow you to have multiple offset accounts as many as seven accounts. The sum of the funds in these accounts are the offsets against your mortgage.
Multiple offset accounts can be used separately according to your needs. However, you need to remember that each of them shall contain a maintaining balance of at least $10,000.
Is It Worth Having an Offset Account?
If you are to consider the amount of money you will save from the interest, the lesser time you need to pay off your mortgage and the convenience and flexibility that having an offset account gives, then it is worth it.
Start Your Property Investment Journey with Investorfi
Paying off your home loan or mortgage can take a long time, but if you have an offset account, you are going to have the luxury of repaying a lower amount of interest in a shorter loan period. Investorfi can help you have it.
Investorfi is dedicated to giving the greatest life hack you will ever experience when it comes to mortgages and other financial strategies. If you need refinancing strategies or you are thinking about property investing, we can help you. Our professional brokers will give the best advice that will benefit you. Contact us today.