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Maximizing Mortgage Efficiency: The Power of Offset Accounts

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In today’s dynamic financial environment, understanding and utilizing efficient mortgage strategies is crucial. One such strategy is the use of offset accounts, a tool that can significantly reduce the interest on your home loan and potentially shorten its term. This article delves into what offset accounts are, how they work, and the myriad benefits they offer to homeowners.

Understanding Offset Accounts

An offset account is a savings or transaction account linked to your home loan. The balance in this account is ‘offset’ against your home loan balance, meaning you’re only charged interest on the difference. For instance, if you have a home loan of $500,000 and an offset account balance of $50,000, you will only be charged interest on $450,000.

Benefits of Using an Offset Account 

The primary advantage of an offset account is the potential savings on interest payments. By maintaining a higher balance in your offset account, you can significantly reduce the amount of interest accrued over the life of your loan. This can also lead to a reduction in the overall term of your mortgage, allowing you to pay off your home loan faster.

Strategic Use of Offset Accounts

To maximize the benefits of an offset account, consider depositing your salary and other income directly into it. Additionally, using a credit card for daily expenses and paying it off in full each month can allow your offset account balance to remain higher for longer, thus reducing your interest payments even more.

Tax Implications and Considerations

Offset accounts can also have tax benefits. Unlike earning interest on a regular savings account, which is taxable, the money saved on your mortgage interest through an offset account is not considered taxable income. However, it’s important to consult with a tax professional to understand any specific implications for your situation.

Who Can Benefit the Most? 

Offset accounts can be particularly beneficial for certain types of borrowers, such as those who may refinance or move homes in the near future. First-time homebuyers and property investors can also find significant value in these accounts, provided they are used strategically.

Choosing the Right Offset Account 

When selecting an offset account, consider factors such as account fees, limitations, and whether it is fully or partially offset. It’s also important to ensure that the offset account is compatible with your specific home loan product.

Considering Account Fees and Charges

  • Annual Fees: Some offset accounts may have annual fees attached. It’s crucial to weigh these fees against the potential interest savings to determine if the offset benefits justify the cost.
  • Transaction Fees: Assess any transaction fees associated with the offset account. While some accounts offer unlimited transactions without charges, others may have limitations or charges beyond a certain threshold.
  • Interest Rates: Explore how the interest rates on the offset account compare to other savings or transaction accounts. A competitive interest rate can contribute to maximizing the offset benefit.

Understanding Fully vs. Partially Offset

  • Fully Offset Accounts: In a fully offset account, the entire balance offsets against the home loan principal. This means that the interest is calculated on the outstanding loan amount minus the balance in the offset account. This type of offset account provides the maximum potential interest savings.
  • Partially Offset Accounts: A partially offset account offsets only a portion of the account balance against the home loan. This is usually a percentage, such as 50% or 80%. While it still reduces the interest payable, the savings are not as substantial as with a fully offset account.
  • Impact on Interest Savings: Choosing between fully and partially offset accounts depends on your financial goals. Fully offset accounts generally offer greater interest savings but may come with different features and fees.

Compatibility with Home Loan Product

  • Loan Compatibility: Ensure that the offset account is compatible with your specific home loan product. Different lenders may have variations in how they structure offset accounts, so it’s important to choose one that aligns seamlessly with your mortgage.
  • Accessibility and Integration: Confirm how easily you can access and manage the offset account. Some accounts may offer online banking, mobile apps, and integration with other financial tools for convenient management.
  • Redraw Facilities: Understand if the offset account comes with redraw facilities. This feature allows you to access additional payments made into the home loan, providing flexibility in managing your finances.

Offset accounts are a powerful tool in the arsenal of any homeowner looking to efficiently manage their mortgage. By understanding and strategically using these accounts, with guidance from a mortgage broker, you can make significant strides in reducing your mortgage term and saving on interest payments.

Frequently Asked Questions

What is an Offset Account?

An offset account is a savings or transaction account linked to your mortgage. The balance in this account is offset daily against your home loan balance, reducing the interest you pay on your mortgage.

How Does an Offset Account Work?

The money in your offset account is used to reduce the balance of your home loan for interest calculation purposes. For example, if you have a $300,000 mortgage and $10,000 in your offset account, you’ll only be charged interest on $290,000.

Can an Offset Account Save Me Money?

Yes, an offset account can save you money on interest payments, potentially cutting thousands of dollars and years off your home loan.

Are There Different Types of Offset Accounts?

Yes, there are full and partial offset accounts. A full offset account offsets 100% of its balance against your loan, while a partial offset account only offsets a portion of its balance.

Can I Access Funds in My Offset Account?

Yes, funds in an offset account are usually easily accessible, similar to a regular checking account, providing both flexibility and convenience.

How Does an Offset Account Compare to Making Extra Repayments?

Both strategies can reduce interest payments, but an offset account offers more flexibility, as you can access your funds if needed.

Phone: 1300 855 022

Email: clientservices@zippyfinancial.com.au

Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.

About the Author:   

Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.   

Connect with Louisa on Linkedin.   

Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).

Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial. 

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Homeowners and Their Mortgage Repayments

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Australian homeowners are loading up their offset accounts in record amounts, so much so that the average household is now almost four years ahead on their mortgage repayments. Seeking advice from a mortgage broker can further optimize the benefits of offset accounts for homeowners.

Do you have an offset account (or several) attached to your mortgage?  

They have become quite popular in recent years, especially since the RBA’s cash rate hit record low levels which impacted the amount of interest that can be earned on savings accounts.

How Much Have Offset Balances Increased? 

Research from the Australian Prudential Regulation Authority (APRA) provided to The Australian shows the average balance sitting in offset accounts is nearly $100,000 – up almost $20,000 since the pandemic started in March 2020.

In total, $222 billion was in offset accounts across the country as of September 2021 – that is up almost $50 billion from $174 billion in March 2020. In the September 2021 quarter alone, offset account balances increased by 10%! 

All of this has helped contribute to mortgage holders, on average, 45 months ahead on their repayments – this is up from 32 months prior to the pandemic.

In terms of the various ways Australians have gotten ahead, 57% of prepayments came from offset accounts, 40% via available redraw balances, and 3% through other excess repayments.

What Is an Offset Account? 

An offset account is a regular transaction account that is linked to your home loan. The advantage is that you only pay interest on the difference between the money in the account and the mortgage. 

Some banks also allow you to have 10 offset accounts attached to your mortgages with cards linked to them that you can use for everyday spending. 

How Does It Work? 

Say you owe $350,000 on your mortgage and have $50,000 in a savings account. If you move that $50,000 into a full offset account, you will only pay interest on $300,000 (which is the loan value minus the amount in your offset account).  

The offset account can then continue to be used for all your daily needs, like receiving your salary or withdrawing cash.  

Why Would You Consider an Offset Account Over a Savings Account? 

With the RBA’s cash rate as low levels, the interest you will receive on the balance in your bank’s savings account will also be at low levels.  

For example, say savings account with a 1% interest rate and a mortgage with a 2.2% interest rate. By allocating money into your full offset account, you would save more money on interest than you would earn in your savings account.

Additionally, interest on your savings account is subject to tax, whereas the interest-saving on your mortgage is not.

Is an Offset Account for You? 

There are additional factors you will want to consider, such as account keeping fees and the minimum amount needed in the account to make it useful.

And obviously, savings accounts and offset accounts are not the only two places you can put your money. Depending on your risk appetite there are also other options you could consider that might yield a higher return.  

Frequently Asked Questions

What is an Offset Account?

An offset account is a regular transaction account linked to your home loan. The money in the offset account reduces the amount of interest you pay on your mortgage.

How Have Offset Balances Changed Since the Pandemic?

Since the pandemic started in March 2020, the average balance in offset accounts has increased by nearly $20,000. As of September 2021, there was a total of $222 billion in offset accounts across Australia.

How Does an Offset Account Work?

If you have a mortgage of $350,000 and $50,000 in an offset account, you will only pay interest on $300,000. The offset account can be used for daily needs like receiving your salary or withdrawing cash.

Why Choose an Offset Account Over a Savings Account?

With low interest rates, the money in a savings account earns less interest. Additionally, the interest earned in a savings account is taxable, whereas the interest saved on your mortgage through an offset account is not.

Are There Any Downsides to Using an Offset Account?

You may want to consider factors like account keeping fees and the minimum amount needed in the account to make it useful. Depending on your risk appetite, there might be other investment options that yield a higher return.

How Can Zippy Financial Help Me with Offset Accounts?

Zippy Financial can help you explore your options and determine if an offset account is suitable for your financial situation.

Everyone’s situation is different, but if you think an offset account might be for you, get in touch and we can help you explore your options. 

Phone: 1300 855 022            

Email: clientservices@zippyfinancial.com.au

Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business. 

About the Author:   

Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.   

Connect with Louisa on Linkedin.   

Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025). 

Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.

RELATED ARTICLES 

SERVICE LOCATIONS

Offset Account of Your Home Loan | Zippy Financial

Looking for ways to pay off your mortgage in record time? Whether you are a seasoned investor or buying your first home, an offset loan can help you reduce interest payments, save on tax and pay your mortgage off years ahead of schedule.

What is an Offset Loan?

With an offset loan (also called an offset account, interest offset account, mortgage offset account or offset home loan) the borrower takes out a home loan and opens a linked savings or transaction account. The balance in savings account is then ‘offset’ daily against the home loan.

How Does an Offset Loan Work?

With an offset loan, instead of receiving interest on your savings account each month, the account balance is offset against your home loan, reducing the amount of interest you pay over the life of the loan.

For example, if you have $20,000 in your offset account and $400,000 owing on your mortgage, the interest on your loan is calculated on $380,000 instead of $400,000.

While your repayments remain the same, you are paying less interest, which means you will be paying off more of the principal. If you can maintain a significant savings balance you can potentially pay off your mortgage years earlier than with another type of loan.

For home owners, another potential benefit is that the Australian Taxation Office does not always consider an offset account to be an interest-earning vehicle, which means you may not have to pay tax on any interest earned on your savings. Seek advice from an accountant or financial planner on the tax implications of an offset account.

Getting Maximum Benefit from an Offset Loan

Because your mortgage interest is calculated daily, many borrowers have their salary paid into an offset account, immediately reducing the interest payable on the home loan, you can still access the money in your offset account online or with an ATM card, but because every dollar is saving you interest, it makes sense to keep the offset account balance as high as possible.

Another tactic is to use a credit card to cover monthly expenses so you can maintain the maximum amount in your offset account. At the end of the month, simply pay off your credit card with the money in your offset account. The danger is if you are not a disciplined spender you may end up incurring interest charges and cancelling out the savings benefit.

What Do You Need to Know About Offset Loans?

The upshot? Many borrowers could benefit from having an offset account, particularly if you plan on refinancing or moving home in the near future. It is worth talking to your broker to find out more about the best option for your circumstances.

Comparison Rate calculated on a secured loan amount of $150,000 for a term of 25 years. WARNING: This Comparison Rate is true only for the example given and may not include all fees and charges. Different terms, fees and other loan amounts might result in a different Comparison Rate. Fees and Charges Apply. Terms and Conditions are available on request.