3 Key Strategies for Using an Offset Account to pay off your home loan faster
An offset account is a powerful tool to help home loan customers pay off their loan faster than they would otherwise. It can help you to save interest each month, each year and therefore, save on interest over the life of your loan. The upside means that you can pay off your loan faster.
So, firstly, what is an offset account?
An offset account sits alongside your home loan account. It is fully transactional, with ATM access, online banking and can accept debit's and credits, just like any other everyday bank account.
However, the difference is that the balance of this account reduces your interest charged to your home loan each month. The higher your balance, the less interest you will pay in that month. The less interest to be charged to your loan, the greater the percentage of your home loan repayment that will pay down your home loan rather than go towards interest.
Just having an offset account doesn't mean that you are automatically maximising your interest savings. Here are 3 Key Strategies for using an offset account to its full potential to reduce your interest on your home loan and to pay it off faster.
Direct your pay into the offset account When your pay goes into the offset account, rather than into another transaction account. it means that your offset account balance is continually 'topped up' when your pay is credited to the account. Sure, your balance will fluctuate as you allocate your pay towards bills and living expenses as they fall due. However, as interest is calculated daily (and then charged monthly to your home loan), your offset balance each day can directly impact upon the amount of interest you will be charged for the month. The higher the offset balance at any point in the month, the lower your interest will be on that day and collectively, your interest charge will be lower when charged to your loan at the end of the month. Your daily balance matters. In a nutshell, if you can have your pay credited to your offset, it can help you to reduce interest on your home loan.
Make your offset account your main transaction account Many home loan customers only allocate a portion of their available income or savings to their offset account. However, by using your offset as your main account, your 'floating' balance will naturally be higher (and therefore your interest lower) than if you were to keep your everyday account with a seperate bank. Many customers try to manage the top up of their offset account from an external account manually (i.e. they transfer ad hoc or an amount at certain times of the month). This strategy is fraught with danger when life kicks in and you are not disciplined in topping up your offset account from another account. Even when you are discipled, it may only be certain times of the month that you transfer over to the offset account i.e,. after you are paid fortnightly. Every day that your money is still sitting in an external account, is a day where you have lost the benefit of a reduction of interest that is accumulating on your loan. A fortnight can matter over the life of your loan. If you are choosing to have an external account out of habit or even an emotional attachment to an account you've had with a bank for a long time, consider the fact that it could be costing you money.
Take advantage of multiple offset accounts for one annual fee
Did you know that a number of banks now allow you to have up to 8 offset accounts on your home loan?
All offset accounts, even if seperate, combine to reduce the interest charged to your loan. So not only will you be able to see your savings in a seperate offset account to your everyday funds, every cent cent you have will be working for you to reduce your interest on your loan.
Multiple offsets can be a great way to manage your money while benefiting form interest savings at the same time. It can also help you to continue to be disciplined and allocate your income across different purposes. If you need to see your savings seperately, they don't need to be in another account. All your money can help you get ahead on your home loan.
Important point to note with regards to an offset account. Offset accounts are not for everyone. For home loan customers where you live to your budget and your pay is quickly allocated to your expenses, it may mean that your offset balance would be too low to make it worth any fee the bank charges for an offset account. (There are other strategies that you can use if you find yourself in this situation - please ask).
Offset accounts do come with fees which range from as little as $15 per month to up to $395 p.a. package fee with many major banks. Therefore you need to speak to your Mortgage Broker to work out whether your individual circumstances make an offset worthwhile. If it is worth while and you can utilise the offset to it's fullest potential, the interest savings can be significant over the life of your loan. And that can't be a bad thing.
This article is not meant as personal advice and is of a general nature only. It should therefore not be relied upon without first receiving advice about your own, individual situation.
