What is an offset account?
By Luke Kidd
It’s essential for all mortgage holders to explore the options available that can help you make the most of your mortgage. Offset accounts are a powerful financial tool that can significantly enhance your borrowing experience. For new lenders and existing mortgage holders alike, understanding the benefits of an offset account can be a game-changer in managing your finances effectively. So, what exactly is an offset account, and how can it benefit you?
1. Saving on Interest:
Imagine having a magic pot where every dollar you deposit reduces the interest on your mortgage. That's precisely what an offset account does. It's a transaction or savings account linked to your home loan. The balance in this account is offset against your mortgage balance, reducing the amount of interest you pay.
For example, if you have a mortgage of $300,000 and $20,000 in your offset account, you'll only be charged interest on $280,000. Over time, this can lead to substantial interest savings, allowing you to pay off your mortgage sooner.
2. Retaining Access to Savings:
Unlike traditional mortgage repayments, which lock away your extra funds, an offset account offers liquidity and flexibility. Your savings remain accessible whenever you need them. Whether it's for unexpected expenses, home improvements, or a well-deserved holiday, you can dip into your offset account without any penalties or redraw fees. This accessibility provides peace of mind and financial security, especially for new homeowners navigating their way through various expenses.
3. General Banking Needs:
An offset account isn't just a one-trick pony. It functions as a regular transaction account, enabling you to manage your day-to-day finances conveniently. You can deposit your salary, pay bills, and use a debit card for purchases, all while benefiting from the interest savings on your mortgage. Some lenders will allow you to hold multiple offset accounts, providing you with additional flexibility in managing your finances.
Now, let's compare an offset account with a loan redraw facility, another common feature offered by lenders.
Offset Account vs. Loan Redraw Facility:
While both options allow you to use surplus funds to reduce interest, they differ in their mechanics and accessibility:
Offset Account: Offers instant access to your savings while still reducing interest on your mortgage. You can deposit and withdraw funds freely without affecting your loan term or repayment schedule. There may be additional fees and costs associated with holding an offset account
Loan Redraw Facility: Allows you to make extra repayments towards your mortgage. These additional payments are accessible but typically come with restrictions and fees for redraw transactions. Moreover, withdrawing funds may extend your loan term or alter your repayment schedule.
In essence, both options can help lenders pay down debt faster while retaining additional flexibility and control over your finances. However, every lender is different and it’s important to understand the potential fees, costs and conditions that can come with holding either an offset account or a redraw facility.
In conclusion, incorporating an offset account into your mortgage strategy can be a smart move for new lenders and first home buyers in Australia. Not only does it help you save on interest and retain access to your savings, but it also streamlines your banking needs. Understanding and exploring the market can be a difficult and complex process. Our lending specialists can provide expert guidance on finding the best deal on your loan and whether an offset account is right for you. Feel free to contact us for more information.
Luke Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001242685)