Choosing the right mortgage to pay off your home loan in Australia can feel like an overwhelming task.
After all, you will be paying off the consequences of this decision for the next 15-30 years (or more), and you want to choose the option that’s going to save you the most money. Typically this decision involves opting for either a fixed rate or a variable rate, but there are also a number of other extra options to consider – an offset account is one of them.
An offset mortgage means linking a separate savings account to your home loan, and using the balance of this account to offset your mortgage and reduce the interest rate.
For example, if your loan repayments total £200,000 and you have £20,000 in your savings account, the interest on the repayments will only be calculated on £180,000 (the difference between the account balances).
An offset account will not accumulate interest as a typical savings account would, but the money will still be accessible to you should you need it – you can withdraw whenever you want.
This is great for peace of mind, because it means that if an emergency happens you can handle it. In order to reduce the likelihood of needing to pay for an accident at your home, make sure that you insure your prized possessions (for those living in Australia, click here to get an online quote).
A number of financial institutions will allow you to link an offset account to your mortgage at a later date, even if you didn’t originally choose that option. So, why should you opt for an offset mortgage?
Reduce Your Interest Costs
The most important benefit of an offset account is that it could significantly reduce the interest on your loan repayments. Over the course of the entire loan, this could save you thousands of dollars and shave years off the time it takes to repay it.
Many banks have a mortgage repayment calculator, such as this one by Westpac that can help you visualise when you will start paying off the interest of your loan and when you will start paying off the principal.
If you’re looking into opening an offset account in Australia, make sure that it’s a 100 percent (full) offset account and not 50 percent, because not only will this reduce the savings you make, it may also throw off your calculations. A 50 percent offset account means that either only half of what you have in the account will be used to offset the mortgage, or that your interest rate will only be partially reduced.
You Still Have Access To Your Money
Being able to access your money is a very important feature. If you were to use that extra money to make an extra repayment on your mortgage, as opposed to putting it into the savings account, you would have essentially forfeited the freedom to use that money if an unexpected expense arises.
Stretch Your Savings
Some banks may also give you the option of opening up multiple offset accounts, which means you can save for a couple of things while shaving money off your mortgage. For example, you could open up a car savings account and a holiday savings account, and the total balance of both of these would go towards offsetting the mortgage. It’s a great way to discipline yourself with your savings.
A couple of things that you should check before opening up an offset account is whether there is a balance limit or if you will incur penalties for a withdrawal.
Having an offset account can provide you with greater flexibility when it comes to your mortgage. You could choose to have your salary deposited directly into your offset account, and you could maintain this account for just a short term period or for the full length of your loan.
Get More From Your Money
You might think that it’s better to keep your money in a term savings account because you accumulate interest on it, but it’s important to see how this interest really stacks up against your loan. The interest earned on a savings account becomes part of your taxable income, so when comparing the benefits of an offset account you should calculate the difference between the interest rate on your mortgage and the interest rate on your savings account after tax. You might find that an offset account would save you more in the long run.