Interest rates are important when applying for a housing loan (mortgage) contract. Housing loans are long-term loans, so even small differences in interest rates add up over time.
Housing loans come with different options and features. These can give flexibility or speed up access to credit.
What is an Offset Account?
Offset accounts offer a strategic advantage for mortgage holders. These specialised savings accounts are linked directly to the mortgage, and their balance is factored into the loan amount used to calculate interest.
Consequently, maintaining a higher balance in the offset account translates to a direct reduction in the total mortgage interest owed.
1) The Principal and Interest will Pay Off the Loan
1.1) Primary Costs and Interest
Most people get this type of home loan. The borrowed amount (principal amount) can be repaid indefinitely, plus interest on that amount. The loan can be repaid over an agreed term (term of the loan), such as 25 or 30 years.
1.2) Interest-only debt
For an initial period (for example, five years), the payment includes only interest on the amount owed. They do not repay the principal of the loan, so it does not reduce their debt. Payments may decrease during the interest-only period, but increase thereafter. Make sure they can afford it. Check out an interest-only home loan.
1.3) Get an affordable short-term loan
Personal loan tenure and duration. It affects the size of the mortgage payment and how much interest you have to pay.
Shorter loan terms (for example, 20 years) mean higher payments, but the person pays less interest.
Long-term loans (e.g., 30 years) mean lower payments, but individuals pay more in interest.
2) Aim for the Lowest Interest Rate possible
A low interest rate of 0.5% can save you thousands of dollars over time.
2.1) Fixed benefits
The fixed rate of interest remains the same over a specified time (for example, five years). The funds then move to a variable interest rate or a new fixed interest rate can be negotiated.
2.2) variable interest rates
Changes in the credit market (for example, when government funding changes) and interest rate fluctuations can move up or down.
3) Work out What can be Affordable to Borrow
3.1) Compare home loans
Compare borrowing rates from at least two different lenders.
3.2) Mortgage lender service
With so many lenders to choose from, one may decide to approach a lender to find loan options for them.
Use an offset account to speed up the mortgage payments by adhering to a budget and maximising the savings in the account.
Offset Account Checklist
Prospective borrowers are advised to carefully scrutinise the features of the offset account linked to their potential mortgage. A close examination may reveal unexpected advantages or limitations that could significantly impact their financial strategy.
- Fees and charges
Assess any associated fees and charges, ensuring they are competitive and reasonable. These fees could include annual or monthly account-keeping fees, which should ideally be minimal
- Interest rate
Confirm that the interest rate offered on your offset account is equivalent to the standard variable rate or lower.
- Full or partial offset
Determine whether the account offers full (100%) offset or partial offset. Full offset accounts offset the entire balance against your mortgage, maximizing benefits. Ensure clarity on this aspect during discussions with your lender.
- Access to funds
Ensure that you have convenient access to your funds similar to a regular bank account. If you’re concerned about spending temptations, consider the redraw facility option, which offers interest rate benefits while restricting access to funds.
- Balance and withdrawal limits
Check for any restrictions on deposit and withdrawal amounts that may incur charges. Reviewing the terms and conditions will help avoid unexpected fees.
How does it work?
Imagine someone has a $500,000 mortgage and $50,000 in their offset account.
Their interest is calculated not on the full mortgage amount but on $450,000 ($500,000 – $50,000) This translates to significant interest savings over the life of the loan.
How to make an offset account work harder?
Once the offset account is established, implement these strategies to optimise its benefits.
- Direct salary deposits
Arrange for the salary to be deposited directly into the offset account. This allows funds to immediately reduce the interest burden, rather than sitting in a standard account with minimal interest earnings.
- Deposit all incoming funds
Utilise the offset account to its fullest by depositing all additional income sources, such as tax refunds, bonuses, or dividends. Every dollar deposited now translates to future interest savings on the mortgage.
- Adhering to budget
Maintain financial discipline to minimise unnecessary withdrawals from the offset account. The longer the funds remain in the account, the greater the interest savings over time.
By adhering to these guidelines and implementing effective strategies, you can harness the full potential of your offset account to expedite mortgage repayment and achieve long-term financial goals.
Benefits of using an offset account
- Reduced interest bill
As mentioned earlier, keeping money in an offset account directly reduces the interest an individual pays on their mortgage, leading to substantial savings.
- Faster loan repayment
The more someone saves in their offset account, the faster they can pay off their mortgage. This can save them years of interest payments and help them achieve financial freedom sooner.
- Improved cash flow
An offset account can improve an individual’s cash flow by allowing them to manage their mortgage payments more efficiently. By minimising interest payments, they have more money available for other financial goals.
Getting the most out of an offset account
Here are some helpful tips to maximise the benefits of an offset account
- Direct salary deposit
Arrange for an individual’s salary to be directly deposited into their offset account. This automatically increases the balance and reduces their interest liability.
- Make extra payments
Consider making additional payments towards the mortgage principal. This speeds up loan repayment and saves them even more money on interest.
- Minimise everyday usage
Avoid using the offset account for regular expenses. The more an individual uses it, the less money it saves them on interest.
Conclusion
To maximise the benefits of an offset account, individuals should consider depositing their salary and savings into the linked account. Additionally, strategic credit card use, where expenses are deducted while maintaining a reasonable balance, can be advantageous. However, these strategies may not be universally applicable. Consulting a lender or mortgage broker is recommended to identify the most suitable solution.
Offset account coverage is offered by most Australian banks with some specific exceptions. Thorough research and comparison of offers are crucial to secure the best fit.
Therefore conducting a comprehensive investigation or seeking professional advice from Success Avenue Property Consulting can facilitate an informed decision.
Disclaimer: The information presented above is in the sense of illustration and discussion only. Any party seeking to rely on content or otherwise should conduct their own due diligence and inquiries to ensure that it is relevant to their personal and business needs and circumstances.