Here at Home Loan Cash Back, it’s our aim to give you the best deal on your home loan, by evaluating the offers available on the market and giving you advice on the deals that are available to you. While we’re looking at the loans that you might be able to apply for, we won’t just be looking at interest rates, but also other factors and fees that could help to decrease the overall cost of your mortgage.
One of the many elements that would-be homeowners like to think about when comparing home loan offers, is whether the deal they go for will come with an “offset account”. A mortgage offset accounts works by deducting or “offsetting” your savings balance against the balance in your home loan account. This ultimately reduces the amount of interest you pay on your home loan, and can also minimize the amount you spend over your loan term.
How Do Offset Accounts Work?
Mortgage offset accounts can be difficult to understand, so let’s take a look at them in closer detail. Imagine you had about $20,000 of savings in your offset account, while the balance of your home loan is at around $200,000. Because of your offset account, the interest in your mortgage will be calculated at $180,000. This means that everything you’ve saved in your offset account is helping to reduce the amount you spend on your home loan.
In the example of a 100% offset account example such as this, a 30-year old who has a $350,000 mortgage could shave about six years and six months off his home loan term simply by maintaining a savings balance of about $50,000 in their offset account.
Another significant benefit of using offset accounts – besides the fact that you can pay off your mortgage faster, is that in most cases, the ATO doesn’t see the offset account as a vehicle for earning interest in the form of income. This means that you can reduce the tax-deductible you have to pay.
What are the Problems with Offset Accounts?
There are obviously a lot of benefits to consider when choosing an offset account. However, there are negatives to think about too. Unfortunately, for instance, is that many borrowers save negligible interest and few years on their loan. That means that the main benefit of offset accounts for these borrowers is that it’s a convenient way to save money interest-free in an account that’s linked specifically to their home loan.
A lot of homeowners use their offset account to keep funds available for living expenses. In the time that a person can maintain their salary in their offset account, they might be able to save a little bit of money on their interest payments. However, a lot of borrowers simply can’t afford to save the money that it would take to continue benefitting from the true advantages that offset accounts have to offer.
In most circumstances, it’s only a good idea to think about getting an offset account as a benefit of your mortgage, if you’re sure that you have the funds to pay into it. Otherwise, you could find out that you miss out on other opportunities and benefits, for something that may not give you a great deal of return on your investment.