Alan Hartstein
Mary Flory
Linking your home loan to an offset account can help you shave years off the loan term and thousands, or even tens of thousands, of dollars off the final amount payable on your mortgage, thanks to the reductions in interest.
» MORE: An offset account: What it is and how it works
Your offset account checklist
Offset accounts, like all bank accounts, come in different flavours so you’ll need to check that the one attached to your prospective mortgage has everything you want. Check for:
- Fees and charges.
- Interest rate.
- Full or partial offset.
- Access to funds.
- Balance and withdrawal limits.
Fees and charges
An offset account is a bank account, so there will almost always be some fees and charges attached. These shouldn’t be too onerous, given that your lender should aim to offer you a competitive mortgage package, consisting of only an annual or small monthly account-keeping fee. Having said that, you’ll want to know exactly what the fees and charges are so you can do some calculations to see how much these fees eat into your savings and whether you could do better with another lender.
Interest rate
Make sure that your interest rate is the standard variable rate and no more than that.
Full or partial offset
A 100% offset account, also known as a full offset account, offsets the entire amount in your offset account against your entire mortgage debt, whereas a partial offset account only offsets some of your debt for interest purposes. You should always opt for the full offset account to derive maximum benefit, though this may attract more in the way of fees. Check the terms and conditions and run through some numbers to see how the difference between the two affects your overall mortgage. You should also be clear from the start when discussing your mortgage with a lender that you require a 100% offset account, not a partial one.
» MORE: What are mortgages and how do they work in Australia?
Access to funds
One of the reasons for taking out an offset account is to have access to your funds in the same way that you would with a normal bank account. If you don’t trust your ability to save the money in the account and are likely to go on a spending spree periodically you may want to go down the redraw facility route instead, where you still achieve the desired interest rate reductions but can’t get your hands on the money as easily.
Balance and withdrawal limits
Some lenders have limits on the amounts you can deposit and withdraw from your offset account without attracting charges so, once again, it pays to read the fine print to ensure you don’t get any nasty surprises.
Maximising your offset account’s potential
Once your offset account is set up, you can realise its potential with the following strategies:
Deposit your salary
Arrange to have your salary deposited directly into your offset account where it can go to work immediately reducing your interest burden as opposed to languishing in an everyday account where it may earn less than 1% in interest.
Put every incoming dollar into your account
Don’t just stop with your wages. Put every incoming dollar into your offset account including tax returns, bonuses, inheritances, share dividends – basically any extra money that comes your way, which you can comfortably spare at the time. Every dollar that goes into your account now means less to pay down the track.
Stick to your budget
Be as disciplined as possible with your finances so you aren’t dipping unnecessarily into your account. Remember, the longer you can leave the money in the account, the less interest you pay and the better off you’ll be in the long run.
Use a credit card to defer expenses
This strategy is tricky and definitely only for the financially disciplined. The trick with an offset account is to keep as much money as possible in it for as long as possible. So, if you can pay for everyday expenses with a credit card and pay off the monthly bill in full inside the interest-free payment period, you’ll save more in the long run. Of course, this implies that you can always pay off the card inside the interest-free period, because the interest you pay on a credit card will be considerably more than the rate on your mortgage.
» MORE: How to pay off your mortgage faster
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