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Many home loans provide the opportunity to decrease your interest payments by paying more than the minimum payment each month.
By reducing the interest payments in your home loan, you can increase the speed with which you pay-off the mortgage. It also boosts the equity you have in your property, giving you opportunity to make other investments.
One common way to speed up your mortgage repayments and increase the equity in your property is through a ‘100 per cent offset account’ with your lender.
This is a dedicated transaction account, similar to an everyday bank account, that’s connected to your mortgage by your lender. You deposit all of your household income into this offset account, which will automatically reduce the balance in your loan account by whatever the balance in the offset account is.
Let’s look at an example. Suppose, for instance, that you have a home loan with a balance of $200,000 and your offset account has a balance of $15,000 in it. In this case, you would have an Australian home loan with a balance of $185,000. This means that the interest on your home loan will be less because it will be calculated based on a lower principal amount ($185,000 in our example) and so more of your repayment goes towards reducing the principal rather than to paying off interest charges.
The $15,000 is still accessible from your offset account, as it acts like an everyday transaction account, it’s just that these savings are working to reduce your interest repayments as opposed to sitting in a regular transaction or savings account.
An offset account can reduce your interest and increase your equity if you continue to maintain a balance in the offset account by depositing all of your house hold income into the offset account. Typically, you’d have a daily transaction account linked to the offset, into which you shift your income as you need it, for bills, or car costs and the like. The goal of the offset account is to maintain a steady balance to continue to reduce the interest charges.
The most crucial objective of an offset account is to make sure that, after you’ve paid your bills, something extra remains in the offset account each month. A couple who deposits $5000 into an offset account each month won’t be accessing the benefits of the offset facility if they continually withdraw the $5000 each month.
Another way to structure your offset account
Once the balance in the offset account builds to a sustainable level, you then transfer surplus funds directly into the home loan. The key here is a clear strategy.
For example, if you consistently have an offset balance over $10,000, start to make lump sum payments on your home loan. If one month you find $15,000 in the offset account, transfer the excess $5000 directly into your mortgage, with the remaining $10,000 still available via redraw.
Clearly offset accounts are suited for disciplined borrowers who are in control of their expenses on a consistent basis. The true benefits of an offset account are only enjoyed when you can maintain a consistent balance in the offset account. The key is fairly straight forward: deposit more than you spend…regularly.
Offset accounts for Australian home loans are a wonderful tool to help you manage your mortgages and build wealth. If you choose to have an offset account, make sure it is 100% to avoid interest from being charged on the amount deposited.
Of course, with any home loan feature, there are questions you might want to ask, most importantly, whether your home loan is eligible for an offset account? If you’re wondering about an offset account and whether it suits your circumstances, reach out to us and start a conversation with one of our home loan experts.