An offset home loan, interest offset account, offset account and mortgage offset account are all similar terms. A mortgage offset account is basically one of the strongest ways of paying off a home loan and for saving thousands of dollars over the lifetime of a loan. It is usually a fully transaction account which can be linked to your investment or home loan. The credit balance of this account is then offset on a regular basis against the outstanding loan balance, decreasing the interest that a person has to pay on his or her loan.
There are several benefits of having an offset account and it is essential to know the correct ways of using this wonderful tool to gain the benefits. The benefits will depend on your personal circumstances and I have a few examples below to show what advantages you can gain.
Although an offset account is a great way of paying off your home loan, and maintaining the tax deductibility of interest there are some disadvantages.
Most offset accounts are only offered with standard variable rate home loans. If you have a standard variable rate home loan you will generally have two options. Pay a package fee (usually close to $400) and receive an interest rate discount of between 0.7% to 1% off the standard variable rate. Or choose to not pay the package fee and pay the higher rate. This is compared to taking a basic variable rate home loan, without the bells and whistles like an offset account but with either low or no ongoing fees. As a general rule of thumb, if you have a home loan above $250,000 you will generally be better of paying the fee, where small loans under $100,000 fees can make a much bigger difference to the overall cost of a loan.
As an example, if you have a $250,000 loan and the standard variable loan with the lenders professional package has a 0.2% better rate then the basic loan that amounts to $500. So even if you are paying a package fee of $400, you are still better off. Not forgetting if you do have significant savings you may be saving yourself hundreds if not thousands of dollars into the future by getting the structure right.
Every scenario is different so it is worthwhile getting professional advice from a quality mortgage broker on your specific circumstances.
You can also save interest on your home loan by linking a credit card to the offset account. When you use your credit card for regular purchases during its interest free days instead of using money from your offset account, your saving interest on your home loan. It is smarter to use the banks cash then your own and save yourself the interest. This not only maximizes the cash in your offset account, but also makes your money work harder. However, make sure that you pay off your credit card when it is due. You can avoid paying interest on credit card by using the money available in your offset account for paying your credit card (in full) by the due date.
Warning: I have found that most people do not use a credit card effectively. The use of a credit card for most people takes away any control they have over the spending habits. Money just slips through the fingers and it is too easy to make purchasing decisions. Basically people spend more money on things they don’t need when they are using a credit card The additional spending wipes out any benefit they may have gained in interest and will regularly send them backward. So only consider this option if you know that you can track your spending and are able to keep to a budget.