100% Offset and Redraw Home Loans
How 100% Offset Accounts Work
When you set up your mortgage, some lenders will offer you the option of an offset account. Offset accounts are no more complicated than a regular transaction account, with ATM access, online banking access, cheque book and all the other regular transactional features. It’s simply linked to your home loan so you’re reducing the amount of interest you’re charged on your mortgage every month.
HomeStar No Fee 100% Offset
A loan to help you consolidate you different finances and help you save at the same time.
- Interest Rate of 6.26%
- Comparison Rate of 6.26%
- Application Fee of $0.00
- Maximum LVR With LMI: 90%
- Minimum Borrowing: $250,000
- Maximum Borrowing: $1,000,000
For example: if you owe $200,000 on your mortgage and you have $20,000 in savings in your offset account, your interest will be calculated on your mortgage balance, minus your savings balance. This means you’re only paying interest on $180,000 instead of the full $200,000 that you owe.
As your savings grow, the amount you save on your interest bill also grows.
Effectively, this reduces the amount of interest charged on your mortgage statement. When you consider that your repayment amount doesn’t change, this allows you to pay more of each payment directly off the principle amount and less in interest costs each month.
Earning Interest on Savings
There is some discussion about not earning any interest on your savings if you leave it all in an offset account. While it’s true you’re not earning any interest on the money you leave in your account, you’re actually more in front than you think.
In most cases, the interest you’d be earning on your savings is lower than the amount you’re charged on your mortgage. You’d also be paying tax on the amount of interest you earn, so it’s reduced even further.
By leaving your money in an offset account, you have the opportunity to save far more in interest charges than you could potentially earn in interest payments.
How Mortgages Benefit from Offset Accounts
Every payment you make is comprised of a principle portion and an interest portion. This is because your mortgage payments are amortised, which means they’re calculated to ensure you pay off your loan over the total loan term, as well as paying your interest charges.
As your level of savings increases, you amend the ratio of these portions.
For example: assume your regular mortgage payment is made up of 90% interest payment and 10% going towards paying down your home loan balance.
If you have savings in your offset account, those ratios alter so you’re paying a smaller portion in interest and a larger portion on the principle balance every month.
Obviously this has the effect of paying off your home loan much faster as your savings grow. You’re also drastically reducing the total amount of interest you’ll pay over the term of your mortgage. Compound interest can.
Maximising Your Offset Account Benefits
Disciplined customers can maximise the effect offset accounts can have on reducing their mortgage quickly in several ways. This following example is in no way mandatory. It’s simply an option to maximise the benefit of having your savings offset against your mortgage.
For example, some banks offer to package multiple banking products together to facilitate easier banking. This means you have your mortgage and your offset account linked together, but you could also have a credit card linked to your accounts too.
If your credit card offers interest free days on purchases, this allows you to pay for your expenses and bills at the beginning of the month and leave your entire income sitting in your offset account.
During that month, you pay no interest on your credit card debt, but your income is having the effect of offsetting your mortgage interest for a longer time, as it’s sitting there untouched for that month.
When your credit card bill is due, you simply transfer your money out of your offset account and onto your credit card so it’s paid off in full. Because your credit card has interest free days, you don’t have to worry about interest payments on that account at all.
If you don’t think you’ll remember to pay your bill before the due date, or if you don’t want to risk it, you can ask your bank to set up an “autosweep” option.
An ‘auto-sweep’ is when your bank automatically sets up a direct payment into your credit card account from your offset account for whatever amount is needed to pay down your balance to zero before the due date. You’re guaranteed never to miss a payment and you don’t have to try and remember due dates. It’s all done for you.
If you’re careful about ensuring you spend less on your credit card than the amount you earn each month, you’ll find your savings will grow over time so the benefits you receive keep increasing.
For those customers who frequently pay for everything using their credit card this way, a card with a rewards program or frequent flyer points can provide another extra little benefit.
Dangers of Offset Accounts
While it sounds relatively simple, an offset account can have drawbacks for some customers. This is especially true for those customers who choose to use the credit card option in conjunction with offset accounts and mortgages.
Of course, if you don’t use the credit card option and just accumulate savings in your offset account, you will simply find your interest charges are reducing. There’s no problem there.
But the temptation to spend more on your credit card than you earn is very high for some people. It’s very important that you control your credit card spending to add up to less than the amount you earn.
This is because your income will be used to auto-sweep your credit card bill at the end of the month. If you don’t have enough funds in that account to pay off the whole balance in full, you will retain a balance on your credit card that will immediately begin attracting interest at a very high rate.
On top of this, when your offset account is cleared to pay off your credit card, you risk your account being overdrawn, or simply being emptied. This negates the value of having an offset account at all if it’s empty.
But if your bank decides to overdraw your account, you could be hit with overdrawn fees, as well as hefty interest charges on your credit card account.
If you really don’t feel that you have the discipline to keep your credit card spending under control or if you think you’ll spend more than you earn, don’t use this option.
Keeping Account Fees Down
One problem some customers may face when setting up offset accounts is higher account fees. You might be paying a $10 monthly account fee on your mortgage, a $10 monthly account fee on your offset account and a $175 annual fee on your credit card. Some banks may even charge transaction fees on your transaction account as well.
This can really add up and eat into the interest savings you thought you were making. It’s important to negotiate with your current lender for lower fees or shop around and compare what other lenders are willing to offer you.
For example, some banks may offer package deals where they’ll waive the account fees and reduce the annual fee if you accept the entire package of financial products. These are sometimes called “professional packages” and often charge one simple annual fee for everything you have within that package that is cheaper than the individual fees charged on the same accounts.
Offset accounts can be excellent for reducing the time it takes you to pay off your mortgage and can save you tens of thousands of dollars in interest. Just be sure you do your homework and understand how they could impact you before you sign up for one.
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- How To Calculate how much you will save with an Offset Account
- Redraw Vs Offset Accounts Explained
- Heritage Bank Offset Accounts
- How much can you Save with an Offset Account?
- Offset Account Home Loan Providers
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