Looking for ways to pay off your mortgage in record time? Whether you’re a seasoned investor or buying your first home, an offset loan can help you reduce interest payments, save on tax and pay your mortgage off years ahead of schedule.
What is an offset loan?
With an offset loan the borrower takes out a home loan and opens a linked savings or transaction account. The balance in the savings account is then ‘offset’ daily against the home loan.
How an offset loan works
Instead of receiving interest on your savings account each month, the account balance is offset against your home loan, reducing the amount of interest you pay over the life of the loan.
For example, if you have $20,000 in your offset account and $400,000 owing on your mortgage, the interest on your home loan is calculated on $380,000 instead of $400,000.
While your principal & interest repayments remain the same, you’re paying less interest, which means you will be paying off more of the principal. If you can maintain a significant savings balance you can potentially pay off your mortgage years earlier than with another type of loan.
For home owners, another benefit is that because you are not actually paid interest on your savings, there is no income to pay tax on. For investors, potential taxation issues with using redraw are solved; the original purpose of the loan (presumably to purchase the investment property) is left intact by using the offset.
Getting maximum benefit from an offset loan
Because your mortgage interest is calculated daily, many borrowers have their salary paid into an offset account, immediately reducing the interest payable on the home loan. You can still access the money in your offset account online or with an ATM card, but because every dollar is saving you interest, it makes sense to keep the offset account balance as high as possible.
Another tactic is to use a credit card to cover monthly expenses so you can maintain the maximum amount in your offset account. At the end of the month, simply pay off your credit card with the money in your offset account. The danger is if you’re not a disciplined spender you may end up incurring interest charges on the credit card, costing more than you benefit.
What you need to know about offset accounts
An offset account in most cases is identical to any other savings account with an eftpos card and online access, so you can withdraw your money at any time.
Most offset accounts are offered with variable rate loans, however some lenders offer offset accounts on fixed rate loans, too.
The benefit of an offset needs to be weighed against any associated cost.
Every dollar interest saved is an additional dollar paid off your loan!
The upshot? Many borrowers could benefit from having an offset account. It’s worth talking to your broker to find out more about the best option for your circumstances.