If you don’t want to feel stuck with a mortgage for longer than you have to, there are a number of ways to reduce the interest you’ll pay over time and shorten your home loan’s life. One of the ways you can accomplish this is through a home loan offset account.
In this article, we’re going to explain what a home loan offset account is and how it works. Keep reading to find out more!
What Is a Home Loan Offset Account?
A home loan offset account is a type of account that you can use to reduce your loan’s interest. It’s used in place of a regular bank account but functions the same way. The only difference is that the account is linked to your home loan specifically.
When you use an offset account, you only pay interest on your home loan balance minus the offset account balance. Effectively, this means that the more money you have in your offset account, the less money you’ll pay on interest.
How Does a Home Loan Offset Account Work?
Home loan offset accounts must be created and linked to your home loan. After the account is created, your funds can be deposited into it, and it will function as a bank account. You’ll still be able to make direct payments using the account, and you’ll be given a debit card linked to the account itself.
How does this reduce your interest rates and the life of your loan? The details depend on your home lender, but the way the account works is the same from institution to institution.
Let’s take a home loan of $250,000 into consideration.
When you use a home loan offset account with a 100% offset, every bit of money in the account offsets the home loan interest amount. Therefore, an account with $50,000 in it offsets the home loan interest amount to $200,000.
Instead of paying interest on a $250,000 loan, you’re paying it on a $200,000 loan. This makes a big difference in the long run.
The best part about it, though, is that the money can still be accessed at any time. You’re not restricted to how the money can be used. Whatever’s in the account will still offset the interest paid on the loan.
Treating a Home Loan Offset Account as a Savings Account
One of the best strategies you can employ with a home loan offset account involves treating it like a savings account.
Over time, the amount of money in the account will continue to grow and offset the amount of interest paid on your home loan. You can still access the money, as you would with a traditional savings account, too.
Interested in learning more about the benefits of having a loan offset account? Find a Total Mortgage branch near you and speak to a mortgage advisor today to discuss your options.
Understanding the Different Types of Offset Accounts
When you’re looking for an offset account, you’ll come across two different options:
- 100% offset accounts: As the name implies, 100% of the account balance is applied to the home loan offset amount.
- Partial offset accounts: Partial offset accounts apply a partial amount of the account to the home loan offset. For example, if you’ve got a 75% offset account, then a balance of $10,000 results in a $7,500 home loan offset.
How to Use a Home Loan Offset Account
If you’re considering a home loan offset account, there are a number of strategies you can employ. Here’s a list of options that may help you determine how to use your offset account in the best way possible.
Open an Account with a Specified Amount
Rather than opening an offset account that you’ll use actively, open one that will only ever hold a specified amount. When you take the time to calculate how much interest you’ll be paying, you can also determine how much you want to save. Then, the account can be filled with the offset amount that can help you achieve that.
Replace Your Bank Accounts Entirely with an Offset Account
A great way to make sure that you keep money in your home loan offset account is by using it in place of your standard bank account. When you don’t have to keep money in your account, chances are that you won’t. This can lead to having too low a balance in your offset account to make a difference.
So long as you’re stable in your finances, you can effectively replace your bank accounts using an offset account from your home loan lender. Your salary can be directly deposited into it, allowing you to keep money in the account and use it regularly.
Use Credit Cards in Combination with an Offset Account
In most cases, credit cards are going to have a lower interest rate than a mortgage. If you should choose to, you can replace your bank account with an offset account, and then use credit cards for your daily purchases. This allows you to keep a larger balance in your offset account, reducing your overall interest greatly.
Like all the other strategies listed here, this is going to require discipline. It works because interest on your home loan is going to be compounded daily. When you keep a larger balance in your offset account and use credit cards for purchases, you reduce interest more effectively.
Explore Total Mortgage’s Mortgage Loan Programs
A home loan offset account is an account tied to your mortgage, which will offset the bank amounts for your monthly loan repayments. It’s a great way to keep more money in your pocket and pay off your loan faster.
If you’re mortgage shopping, be sure to explore Total Mortgage’s loan program options when you’re ready to purchase a home. If you have any questions about your mortgage options, schedule a meeting with one of our mortgage experts.
Apply online today and get a free rate quote.
Filed Under: mortgage-interest-rates