Mortgage offset accounts and how you can use them effectively to wipe years off your mortgage…
Obviously, not all home loans have an offset account facility, and there are also differences amongst products that do have offset accounts. Some have just one offset facility, and other products allow you to have many bank accounts all offsetting your loan.
How it works…
Basically the way it works is, you have a bank account attached to your loan, and any money that is sitting in that account will actually offset the balance of the loan at the time that your interest is calculated each month.
So, as an example if you have a $500,000 home loan, and $10,000 sitting in your offset account, that month you’ll only be charged interest on $490,000 instead of the full $500,000. This means that more of your fixed monthly repayment is actually reducing the principle instead of just covering interest.
Over time this strategy can add up to a lot of interest savings and as a result allow you pay off your home loan faster.
How to take advantage of offset accounts
The best way to take advantage of this, if you do have an offset facility, is to use your offset account as your savings account. So instead of using a high-interest online savings account, put all of your savings into your offset account.
The best thing is, the account acts like a normal bank account so you can take your money back out whenever you like, but while you’re not using it, it’s working for you.
If you have a product that allows you to have multiple offset accounts, then set up a couple, one for your cash hub, where all your income is received, one for spending and one for saving.
You can transfer between the accounts as much as you like but all the money sitting in all of them is added up by your bank, and reduces the interest charged. Make sense? It’s a great advantage and gives you more flexibility than a redraw facility does.
Over the life of your loan, this can make a real difference, and means you can save for things without feeling like you should be putting all your extra money onto your mortgage instead of on saving for something else you really want.
There are a number of different loan types, and this is just one of them, it may not be right for you, so it’s always good to check with a professional adviser before making a selection, but if you do already have a home loan with an offset facility hopefully I’ve given you some tips on making it work well for you.
How To Wipe 7 Years Off Your Mortgage
You’ll find a lot more ways to pay off your home faster in the 8 Week Money Makeover.
One of our students is on track to wipe 7 years off his mortgage using the money management strategy I teach in Week Two.
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