Many home buyers focus on the here and now, what they can afford today, rather than in the future and the size of their loan balance in 10 or 20 year time. We all know its good to plan for the future. We also know the years roll around quickly and its better to pay off a mortgage before its term, with less interest on your overall loan.
That’s when an offset account can be a good match for your mortgage.
Not sure what offset accounts are? Below Your Loan Hub explains the basics. Read on to find out if this is a good option for you.
What is a mortgage offset account?
A mortgage account with 100 per cent offset is a fully featured transaction account that sits alongside a home loan. In many ways it acts just like a regular bank account.
However, along with the usual facilities, like ATM access and direct debit, there’s another significant advantage: Any money sitting in the offset account reduces the amount that the bank calculates interest payments against.
That’s right. The loan principal is reduced for the purposes of interest calculation by the amount of money in the offset account, without increasing the repayment amount.
How does a mortgage offset account work?
An example may make it easier to understand how an offset account works. If a home buyer has a principal of $350,000 outstanding on their mortgage and also has $10,000 in a linked 100 per cent offset account, the bank will only charge them interest on $340,000.
The money they save in interest goes straight into paying down their loan principal, which has the effect of reducing the interest paid over the life of the loan, as well as the overall loan term. Less money paid off faster.
When borrowers realise that banks calculate interest on mortgages daily, offset accounts can be used proactively. For example, getting salary paid into an offset account means the loan principal is in effect reduced by that amount as soon as it is paid.
Is a mortgage offset account worth it?
It is always good to compare a range of competitive products. Look at loan features like offset accounts so you can make informed decisions.
Anyone with a mortgage can choose to have a linked offset account, although it will depend on the loan type and institution. It’s always best to check the offset is 100 per cent.
It’s important to know that offset accounts are usually included as part of fully featured home loans. Which might mean you pay more in fees or a higher interest rate. So analysing your financial circumstances is a smart first step.
Originally published by Your Loan Hub, Mortgage offset accounts: Making your loan work for you.
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