The magic of a mortgage offset account

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If I said there was a way of paying less interest and reducing the length of your home loan how would you react?

I am presuming just about everyone is screaming, ‘Yes please!’ Let’s face it, when you have a mortgage you need all the help you can get! The great thing about this tip is that there really isn’t any magic involved. So no rabbits, hats or wands - just a little bit of clever accounting called a mortgage offset account. Otherwise known as a home loan offset account or just an offset account if you are feeling lazy.

Is it complicated?

No. Much easier to work out than a magician’s trick. An offset is a regular savings or transaction account linked to your home loan. Any money you deposit into it helps to reduce the balance of your home loan. That means your interest payments will also be lower.

Here is how it works for Bob

Bob has a 25 year home loan for $200,000 with a monthly interest of 5%. He deposits $10,000 into his offset account. He now only pays interest on the difference $190,000 – as long as he keeps that balance in his offset account. His monthly interest would drop from $821 to $780 – a saving of $41. Compound that over the term of the home loan and he could shave 5 years off his home loan.

To really get the most benefit Bob should make regular deposits into his offset account. That way as his balance grows the amount he saves on his interest also grows. He should also ideally have a separate day-to-day account, so he doesn’t draw from the offset and leaves it to grow.

What do I need to look out for?

Like any financial product, the devil is in the detail.

Home loans with an offset account attached are a little more expensive than a regular home loan. But the marketplace is getting more competitive – so it is worth doing some research to find the best deal out there. Also look for a 100% offset account, as opposed to a partial offset. This will offset the full balance in your account against your mortgage, not just a portion.

Offset accounts are also often attached to a variable rate home loan, which tend to have a higher interest rate. Some offset accounts will also charge you transaction fees, so look out for these in the terms and conditions.

So, should you rush out and get an offset account today? Only if you are able to maintain a healthy balance in your offset and are disciplined enough to save into it. That also means no dipping into it. At all.

See. No magic, just some creative accounting.

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