A mortgage offset account can offer the ideal combination of easy access to cash savings while helping you pay off your home loan sooner.
One of the best ways to get ahead on your home loan is by making extra repayments. But this comes with the downside of tying up cash – money that may be needed for unexpected bills and emergencies.
A mortgage offset account can be the solution that lets you enjoy the best of both worlds – at-call access to your money plus valuable savings on interest charges to fast-track your way to mortgage freedom.
How does an offset account work?
An offset account is an everyday transaction account linked to your home loan. The balance is deducted from (or ‘offset’ against) your home loan when loan interest charges are calculated.
Let’s say, for instance, that you have a home loan of $400,000 and $10,000 sitting in the offset account. Instead of paying interest on the full $400,000, the monthly interest charge will be based on a loan balance of $390,000, thereby providing a big saving on interest costs.
But the benefits don’t end there. As your regular loan repayments stay the same, the reduction in interest charges means more of each payment comes straight off the loan balance. This reduces the following month’s interest cost, and in this way the loan pendulum starts to swing in your favour.
A smart way to use spare cash
The bottom line is that a home loan offset account can be a smart way to use spare cash. Interest rates on deposit accounts are lower than home loan rates, and bear in mind, interest earned on savings is fully taxable. So, by holding spare cash in a mortgage offset account, you can save more in loan interest than you would otherwise earn with a separate savings account – especially after allowing for tax.
It doesn’t take a big lump sum of cash for an offset to make a decent dent in loan interest charges. Steadily growing the balance of the linked account can lead to supersized savings over time. And if you’re saving for personal goals like an overseas holiday, an offset account can be used to build funds while still helping you forge ahead with your home loan.
Plan your cash needs
The more money you have in the linked account, the bigger the savings on home loan interest, and some clever cash management can really boost the benefits of a mortgage offset account.
One strategy worth considering is to use your credit card to pay for a range of household expenses each month, while leaving as much cash as possible in the offset account. When your card statement arrives, dip into the offset account to pay off your card balance in full before interest charges apply. This way, you maximise the balance of the linked account for as long as possible.
Take a look at comparison websites for the offset account best suited to your needs.
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