Learn how a offset account may help you manage your mortgage and save money on interest. Australians are collectively saving billions of dollars in interest each month with over $257 billion saved in these accounts. Discover the best ways to use offset accounts, be aware of any possible risks, and optimise your savings.
What aspects of an offset account should I be aware of?
Every dollar deposited into an offset account lowers the amount of interest paid on a mortgage, which is advantageous for cost savings. For example, if a person has $50,000 in their offset account and a $500,000 house loan, they will only be responsible for paying interest on $450,000 of the loan.
This is beneficial since savings account money is taxed and house loans usually offer greater interest rates than savings accounts. It’s important to do extensive research to make sure choosing an offset account is a wise financial move because certain banks may charge higher interest rates and expenses. It’s also important to make good financial decisions and know what impacts your own budget. If a borrower with a $500,000 mortgage placed $50,000 in their offset account rather than a high-interest savings account, they may save $973 over the course of a year, according to the example given. Nevertheless, the savings can be lower ($144 in the example) if the bank charges a somewhat higher rate for the offset account.
How may my accounts be maximised?
- Astute borrowers frequently get their employers to deposit their paycheck into an offset account, which they then utilise to cover regular monthly costs.
- This tactic minimises mortgage interest while enabling borrowers to use their money for regular spending.
- Borrowers can maximise their savings by reducing their home loan debt on a daily basis by placing their pay into the offset account.
- For example, if a $6,000 post-tax income is deposited into the offset account each month and spent in full throughout the pay cycle, the annual savings might be about $200.
- Make sure, nevertheless, that the savings from this strategy exceed any account costs related to the offset.
- If the account imposes an annual cost, such as the $395 fee levied by certain prominent banks, the potential savings may be nullified, leading to an overall financial loss for the borrower.
Is there an alternative to an offset account?
The primary alternative to an offset account is to employ a redraw facility, which allows you to deposit excess cash into your mortgage and withdraw it as needed.
While both types of accounts can help you save money on interest, some redraw facilities include a lot of tiny print, so be sure you understand everything.
While most redraw facilities are fee-free, some banks charge consumers to withdraw money.
Some banks may also think that any additional funds you contribute to your mortgage are theirs rather than yours, reducing the amount you may pull over time as part of your monthly repayments are paid for.
It’s also worth mentioning, if you’re an investor, that redrawing money from your loan has tax ramifications.
Offset? Redraw? What works best?
Financial hacks may provide significant benefits, but only if they fit your lifestyle, philosophy, and financial circumstances.
Take the time to analyse your alternatives and even perform some calculations to ensure you’re making the best pick for your situation.
