How Attaching a Mortgage Offset Account to Your Home Loan Can Save Tens of Thousands of Dollars
Get The Edge With Your Home Loan
Anyone who is paying off their home loan or even their investment property loan may want to seriously consider adding an offset account to their loan to help pay the mortgage off much faster.
Mortgage offset accounts evolved from the era when Lines of Credit were so popular, however many homeowners quickly became disillusioned with them, because they were tempted to overspend with Lines of Credit types of loans.
The Original Prototype Didn't Work Too Well
With Lines of Credit or Equity Loans as they're also known you were only required to make interest only repayments. Additionally, many had pre-approved limits, just like a giant credit card and this allowed the borrower to walk around buying shiny objects to their hearts content (that is until they reached the facility limit).
Worse still, many had what were known as capitalising interest Lines of Credit. With these you were not required to have any repayments at all, just let the interest capatilise until the accumulating interest hit the ceiling of the facility limit.
The real downside with these loans was, many people ended up owing the bank (to the banks glee and delight) a whole lot more than what they started out with.
New Improved Model
On the contrary, Offset Accounts, which evolved from the declining popularity of Lines of Credit do require some kind of payment on a regular basis. This is either a principal and interest or an interest only repayment.
Simply, an offset account is an additional transaction account (just like a regular chequing or savings account) to your loan account into which you can deposit your money. The money you put in there can be your pay cheque/s or any other money that you're not necessarily using right away. Any balance registered in your offset account will automatically offset against your mortgage balance.
The money you put into your offset account can be the normal cash flow from your salary or even your existing savings. Additionally, from time to time you may have access to other proceeds such as sale of a car, or some other asset that you would want to temporarily set aside for future use.
Set It And Forget It
There is no loss of convenience with these accounts, because as we mentioned they operate just like any normal chequing or savings account.
Also, they have all the features most of us have grown accustomed to like ATM and EFTPOS access, internet and phone banking.
Once you've set up all your direct debits including you home loan repayment you can just set it and forget it.
Your Money Will Work Tirelessly For You
The big plus though is, with an offset account, you will benefit from the balance of your Offset Account and your Loan Account on a daily basis. This allows them to calculate the interest owing on a daily basis and charge it to your account monthly in arrears.
In other words, it traces and records all your deposits and withdrawals and calculates your loan balance automatically on a daily basis and offsets the balance in the offset account against your loan account.
This on a regular basis will save you a substantial amount of interest charges over and above what you would normally pay.
If you would like to get a bit of an idea whether or not an offset account is for you, then you can conveniently calculate the savings on your mortgage by accessing a Mortgage Offset Calculator on the internet.
Just Google Mortgage Offset Calculator. Be advised though some are better than others, so you may have to go through a couple to find the one that you're happy with.
It also works as Savings Accounts
Practically, the Offset Account also functions as a savings account, because any cash balance it has will be offset against the mortgage balance.This means interest saved is interest earned, tax free.
For example if your mortgage interest rate is 6%, then you're equivalent savings account rate would have to be approximately 9% (before tax, also dependent on your tax bracket) to equal the savings you're making on your home loan.
How to Turbo Charge your Offset Account Home Loan
Your regular salary gets deposited into this account without any loss of convenience since it also operates like any regular transaction account, incorporating other features like internet and phone banking, ATM, B-Pay, and Eftpos access.
You can substantially increase your interest savings benefits by using an interest free credit card which you can use to accumulate your regular monthly expenses. This means you will not have to draw down the money you have in your Offset Account. This allows, the cash balance of the offset account to remain as high as possible throughout the month.
Then, with most lenders (not all) you can arrange an automatic electronic sweep set up to clear any credit card balance back into the offset account at the end of each month.
So, what this means is, you carry no ongoing balance on your credit card forward and during the month your cash balance in the offset account stays as high as possible, saving you more money on home loan interest payments.
So, how do you get these Offset Accounts?
Most home loan lenders offer them and if you already have a home loan, then the lender you're with will probably offer them. However, all offset accounts are not equal, as some are more of a hassle to operate than they're worth. While others are a godsend in the way of the convenience and savings they deliver.
Most offerings of offset accounts from most lenders are described under the umbrella of Professional Package loans, where you get a substantial discount off of the lenders standard variable rate loan.
How much will it cost?
Now you know the banks, nothing is for nothing, so they do charge a fee for these professional package 'Offset Account' loans. This is normally in the way of an annual fee which varies in Australia from around $120 to $395 a year, depending on the lender.
This shouldn't concern you too much though, as the savings you make when you operate an offset account with a reasonable amount of money management nous will more than compensate you for any fees.
Also, there are no additional charges for the offset transaction account and you get all the other banking features thrown in, including free ATM's and EFTPOS.
When pondering if an Offset Account is right for you, you should consider the benefits of utilizing every tool at your disposal in order to pay your home loan off faster, Especially since, the owner occupier home loan is non-tax deductible.
This means, if you don't find ways to accelerate the pay off of your loan it's going to be a long uphill slog, because you're going to be paying your home loan off with your after tax dollars.
Anyone who is paying off their home loan or even their investment property loan may want to seriously consider adding an offset account to their loan to help pay the mortgage off much faster.
Mortgage offset accounts evolved from the era when Lines of Credit were so popular, however many homeowners quickly became disillusioned with them, because they were tempted to overspend with Lines of Credit types of loans.
The Original Prototype Didn't Work Too Well
With Lines of Credit or Equity Loans as they're also known you were only required to make interest only repayments. Additionally, many had pre-approved limits, just like a giant credit card and this allowed the borrower to walk around buying shiny objects to their hearts content (that is until they reached the facility limit).
Worse still, many had what were known as capitalising interest Lines of Credit. With these you were not required to have any repayments at all, just let the interest capatilise until the accumulating interest hit the ceiling of the facility limit.
The real downside with these loans was, many people ended up owing the bank (to the banks glee and delight) a whole lot more than what they started out with.
New Improved Model
On the contrary, Offset Accounts, which evolved from the declining popularity of Lines of Credit do require some kind of payment on a regular basis. This is either a principal and interest or an interest only repayment.
Simply, an offset account is an additional transaction account (just like a regular chequing or savings account) to your loan account into which you can deposit your money. The money you put in there can be your pay cheque/s or any other money that you're not necessarily using right away. Any balance registered in your offset account will automatically offset against your mortgage balance.
The money you put into your offset account can be the normal cash flow from your salary or even your existing savings. Additionally, from time to time you may have access to other proceeds such as sale of a car, or some other asset that you would want to temporarily set aside for future use.
Set It And Forget It
There is no loss of convenience with these accounts, because as we mentioned they operate just like any normal chequing or savings account.
Also, they have all the features most of us have grown accustomed to like ATM and EFTPOS access, internet and phone banking.
Once you've set up all your direct debits including you home loan repayment you can just set it and forget it.
Your Money Will Work Tirelessly For You
The big plus though is, with an offset account, you will benefit from the balance of your Offset Account and your Loan Account on a daily basis. This allows them to calculate the interest owing on a daily basis and charge it to your account monthly in arrears.
In other words, it traces and records all your deposits and withdrawals and calculates your loan balance automatically on a daily basis and offsets the balance in the offset account against your loan account.
This on a regular basis will save you a substantial amount of interest charges over and above what you would normally pay.
If you would like to get a bit of an idea whether or not an offset account is for you, then you can conveniently calculate the savings on your mortgage by accessing a Mortgage Offset Calculator on the internet.
Just Google Mortgage Offset Calculator. Be advised though some are better than others, so you may have to go through a couple to find the one that you're happy with.
It also works as Savings Accounts
Practically, the Offset Account also functions as a savings account, because any cash balance it has will be offset against the mortgage balance.This means interest saved is interest earned, tax free.
For example if your mortgage interest rate is 6%, then you're equivalent savings account rate would have to be approximately 9% (before tax, also dependent on your tax bracket) to equal the savings you're making on your home loan.
How to Turbo Charge your Offset Account Home Loan
Your regular salary gets deposited into this account without any loss of convenience since it also operates like any regular transaction account, incorporating other features like internet and phone banking, ATM, B-Pay, and Eftpos access.
You can substantially increase your interest savings benefits by using an interest free credit card which you can use to accumulate your regular monthly expenses. This means you will not have to draw down the money you have in your Offset Account. This allows, the cash balance of the offset account to remain as high as possible throughout the month.
Then, with most lenders (not all) you can arrange an automatic electronic sweep set up to clear any credit card balance back into the offset account at the end of each month.
So, what this means is, you carry no ongoing balance on your credit card forward and during the month your cash balance in the offset account stays as high as possible, saving you more money on home loan interest payments.
So, how do you get these Offset Accounts?
Most home loan lenders offer them and if you already have a home loan, then the lender you're with will probably offer them. However, all offset accounts are not equal, as some are more of a hassle to operate than they're worth. While others are a godsend in the way of the convenience and savings they deliver.
Most offerings of offset accounts from most lenders are described under the umbrella of Professional Package loans, where you get a substantial discount off of the lenders standard variable rate loan.
How much will it cost?
Now you know the banks, nothing is for nothing, so they do charge a fee for these professional package 'Offset Account' loans. This is normally in the way of an annual fee which varies in Australia from around $120 to $395 a year, depending on the lender.
This shouldn't concern you too much though, as the savings you make when you operate an offset account with a reasonable amount of money management nous will more than compensate you for any fees.
Also, there are no additional charges for the offset transaction account and you get all the other banking features thrown in, including free ATM's and EFTPOS.
When pondering if an Offset Account is right for you, you should consider the benefits of utilizing every tool at your disposal in order to pay your home loan off faster, Especially since, the owner occupier home loan is non-tax deductible.
This means, if you don't find ways to accelerate the pay off of your loan it's going to be a long uphill slog, because you're going to be paying your home loan off with your after tax dollars.