What’s All the Hype About?
You may have heard the term ‘mortgage offset account’, but not quite sure what it’s all about or how it can help to reduce your mortgage faster. Also known as an offset home loan or interest offset account; this is a financial product acquired through the bank and is essentially a type of savings account linked to your home loan account.
Fundamentals of Mortgage Offset Account
There are essentially two accounts in an offset facility. The first is a transaction account where you keep your savings, similar to how you would in savings account. The second is the home loan account itself.
An offset account helps to reduce the amount of interest you pay on your mortgage, which in turn helps to reduce the principal a t a faster rate. Since your loan principal may be significantly reduced, you may be able pay off your loan much sooner than you plan, or build up your equity much faster than you expected.
For instance, you have a $100,000 mortgage and your linked mortgage offset account has $10,000. In this particular scenario, the interest calculated on your loan is reduced by the amount in your linked offset account which is $10,000. Therefore, your interest is only calculated on $90,000.
Potential Benefits and Strategies
Mortgage offset accounts work similar to your savings account, except that rather than earning interest on your savings – you simply save money on your mortgage.
So on one hand you could be earning a rate of say 3% on your savings, which then may be subject to tax at your marginal tax rate – on the other hand you could just simply save 5% on your home loan and not pay the interest to begin with.
The best financial advice you can get from any mortgage and home loan expert is to pay off the loan as soon as you possibly can. However, linking a mortgage offset account to your loan account also offers potential benefits and financial strategies.
Mortgage offset accounts can be used as a fully functional transaction account. Therefore, you can use this account in order to regularly manage your cash flow. You can direct your incomes and rental income to your linked offset account. This arrangement allows your income sources to contribute to offsetting your home loan interest.
On the flip side, if you don’t have funds held in your account regularly, then you may not receive all that much benefit from an offset account. In many cases an offset account may have some type of additional fee for the product, if you don’t use your offset account regularly as part of your mortgage reduction strategy then you need to ask yourself the question ‘am I paying extra for this privilege and is it costing me more than it is savings me?’.
Using a mortgage offset account is a plausible strategy to lessen your burden on interest rates on your loan principal. To learn more about offset account and maximizing its full potentials, consult one of our mortgage brokers today!