Pay Your Mortgage Off Sooner With A Mortgage Offset Account

Posted on June 17 · Comments

A mortgage offset account can help you pay your mortgage off sooner, saving you money.

A mortgage offset account is a saving account that is tied to your mortgage.

It acts like a normal savings account and can eliminate the need for separate bank accounts, saving you money on account keeping fees.

The balance in your mortgage offset account offsets the balance of your loan, reducing the principle and therefore reducing the interest paid on the loan.

The ‘notional’ interest on the offset account is earned at the same rate as the interest on the loan. As many lenders calculate interest daily and charge it monthly, you get the benefit of reducing the calculated interest on your loan each time you put money into your offset account.

Your repayments however are calculated on the full loan amount, therefore they are working more effectively at reducing the principle and the interest the loan attracts allowing you to pay your loan off faster.

As you aren’t actually ‘earning’ interest on your offset account, the amount just ‘offsets’ your loan, you are not earning any assessable income on your savings account, therefore it can reduce the amount of tax you pay as well as reducing the interest on the loan.

There are two types of offset accounts available. A 100% offset and a partial offset account, where only a percentage of your savings offset your loan. Obviously, the 100% offset account will save you more.

Example

Your loan is for $300,000 for 30 years but you have $10,000 saved in your offset account. The interest is calculated on $290,000. Assuming that the interest is 6% (over the term of the loan and you continue to keep $10,000 in the offset account), this could save you up to $47,000 and cut almost 3 years off your loan.

The larger the savings in your offset account and the longer you keep them there, the more benefit you will get from the facility.

Things to consider

A good offset account should have all the features of a regular savings account: internet access, telephone banking, EFTPOS and ATM facilities and BPAY. You should be able to direct credit your salary into this account, and auto debit mortgage and credit card payments.
A mortgage offset account will only be a benefit to you if you have savings.
In some cases (particularly when the bank is only offering a partial offset account) it may be better paying down the loan directly or investing your money. Do the maths first.
Many fixed interest rate mortgages do not offer an offset account.
Lenders may set conditions on the offset account facility. They may require a minimum balance before the offset benefit is triggered.
Some mortgages (but not all) with an offset account facility may have a higher interest rate than the standard variable rate or fees attached to the account. Check to ensure the offset account is not costing you money rather than saving it.
Some people get to a certain level of savings and either spend it or stop saving. If you want to pay off your loan quickly, it may be advantageous to transfer savings directly onto your loan every so often, to encourage you to continue saving.

Disclaimer:

This is general information only and does not constitute as personal financial advice. It does not take into account personal circumstances. You should seek professional advice before making financial decisions.