A Millennial's Guide to Offset Accounts
I don’t think I’ll ever be un-baffled by the things we’re not taught in school. Don’t get me wrong, educators work tirelessly to essentially turn us from screaming, whining, non-verbal toddlers to actual functioning human beings, but for some reason, there’s a huge chunk of need-to-know info that we’re not told anything about.
Like what the bloomin’ heck an offset account is.
The Broke Generation is here to get you up to speed. So, the topic of today is… the humble offset account. It might sound like a hideous banker term that you want nothing to do with, but when used correctly, it’s kinda like your mortgage BFF.
Ok, so when you decide you’re going to chuck on your big girl panties and go get yourself a mortgage, you’ll probably hot foot it down to your broker with a soy cappuccino in one hand and an empty notepad in the other.
In your first discussions with your broker about your budget, income, property goals and all that jazz, tell them you want a loan with an offset facility.
Just do it. You’ll thank me later.
Not all loans have an offset facility, so it’s important to mention that you want one.
“Why do I want one?”, you ask.
You want one because an offset account is a sneaky little sort-of-savings-account that allows you to reduce the interest you pay on your home loan.
Let’s say your Grandpa passes away (sorry Grandpa), and he leaves you $10,000 in his will. You decide you’re going to adult harder than you’ve ever adulted before and pay it off your mortgage – BOOM, YOU GO GLEN COCO. The thing is, you’re kinda tempted to keep it in savings for a rainy day, or in case the going gets so tough you just NEED to send yourself to Bali, like right now.
A sensible dilemma.
Enter: your new BFF the offset account *applause and incessant wooping*
If your home loan has an offset facility, you can put your $10,000 from Grandpa into the offset account, and your home loan interest will be calculated as though that $10,000 had been paid off of your balance – when in fact, you can still access the $10,000 at any time, as though it were cash.
Example: your home loan remaining balance is $300,000, and your interest rate is 3.99%. Your monthly interest due is $997.50 (of course this decreases as you pay your balance down, but let’s assume it remains static for the sake of this example).
If you offset the $10,000, your interest rate is calculated at 3.99% of $290,000, making your monthly interest $964.25.
So, you’re making a monthly saving on your interest repayments, but the money is still sitting there for a rainy day. Yeah, it sounds like a miracle loophole in the land of mortgages where loopholes generally don’t exist – I know, and it’s amazing.
The only time when doing so wouldn’t be advisable is if you can earn more interest on the balance in a regular savings account. Make sure your home loan rate is higher than the interest rate on your savings account, to ensure you’re #winning the system.
Also, you’ll probably find that you can’t use an offset facility on a fixed home loan rate. As such, only fixing a portion of your loan and leaving some under a variable rate can give you the best of both worlds.
*information in this article is of a general nature only. Always consult a financial professional for advice tailored to your circumstances.