Mortgage offset accounts

Making your loan work for you

Savvy borrowers have an endgame in sight before they even apply for a home loan, and with the right mortgage offset account, they could win that game even more quickly.

Home buyers usually focus on the here and now, not the distant future. Rather than the size of their loan balance in 10 or 20 years, they are more likely to think about how much they can borrow and the kind of property they can afford.

But smart borrowers know the future matters. The years roll around and it’s always better to pay off a mortgage before its term and pay less interest to the bank.

The good news is that if a mortgage offset account is right for a borrower, it can help them do just that. An offset account can make them a match for their mortgage.

What is a mortgage offset account?

A mortgage account with 100 per cent offset is a fully featured transaction account that sits alongside a home loan. In many ways it acts just like a regular bank account.

However, along with the usual facilities, like ATM access and direct debit, there’s another significant advantage: Any money sitting in the offset account reduces the amount that the bank calculates interest payments against.

That’s right. The loan principal is reduced for the purposes of interest calculation by the amount of money in the offset account, without increasing the repayment amount.

In other words, you earn interest on your savings at the same rate you pay on your mortgage. Who would not want to earn about 4% on their hard-earned dollars rather than the 1.5% offered on standard savings accounts?

How does an offset account work?

An example may make it easier to understand. If a home buyer has a principal of $350,000 outstanding on their mortgage and also has $10,000 in a linked 100 per cent offset account, the bank will only charge them interest on $340,000.

If the loan is a “Principal & Interest” loan, the money they save in interest goes straight into paying down their loan principal, which has the effect of reducing the interest paid over the life of the loan, as well as the overall loan term. Less money paid off faster.

If the loan is an “Interest Only” loan, then they simply pay less interest every month. So the more you have sitting in an offset account, the less interest you pay at the end of the month.

When borrowers realise that banks calculate interest on mortgages daily, offset accounts can be used proactively. For example, getting salary paid into an offset account means the loan principal is, in effect, reduced by that amount as soon as it is paid.

Savvy borrowers may even choose to use interest-free days on their credit cards to pay for goods and services, so they can keep cash in their offset accounts working for them.

Home loans versus investment loans.

If a borrower has a home loan (for the property they live in) and investment loans, then it is best to have the offset account against the home loan. This is because the home loan is not tax deductible, so in real terms it costs a lot more to service than an investor loan (despite the interest rates being cheaper for a home loan). Once the home loan is paid off, then the offset account can be linked to any tax deductible loan.

How can my mortgage broker help?

Mortgage brokers help borrowers apply for and secure appropriate home loans every day, and many will have an accompanying offset account. They will usually compare a range of competitive products, and look at loan features like offset accounts so borrowers can make informed decisions.

Anyone with a mortgage can choose to have a linked offset account, although it will depend on the loan type and institution. It’s always best to check the offset is 100 per cent.

It’s important to know that offset accounts are usually included as part of fully featured home loans, which might mean you pay more in fees or a higher interest rate. So discussing your financial circumstances with a broker would be a smart first step.

Game, offset, match

It’s interesting that lenders offer offset accounts as it really benefits borrowers, not the banks. On the contrary, it makes the banks cost of borrowing more expensive because there is less money deposited in standard savings accounts.

Borrowers who are serious about winning the mortgage game need to be aware that having a mortgage offset account could offer them an edge in the long term. It is a most powerful tool in any smart borrower’s arsenal.

In any sport, a match isn’t won instantly. Points are accumulated over time. With the points scored daily by an offset account, it can be game, offset and match a lot sooner!