How To Calculate how much you will save with an Offset Account
An offset savings account is a transaction account linked to your home loan that allows you to use your savings balance to your advantage by reducing the amount owed and applying this to your home loan through the interest payable.
The main advantage you will get from having an offset savings account linked to your home loan is that, in time, it will lessen the term of the loan. Thereby saving you money. The longer the period the more you stand to save.
A small business owner who experiences irregular cash flows may also benefit by being able to deposit larger amounts in the savings account when money is more readily available.
Offset savings accounts will ease the compound interest that makes the long term total interest payable on a home loan so large as it reduces the principal through the offset savings account balance. In such a way significant savings can be experienced over time.
How to calculate offset savings accounts.
If for instance you had a $300,000 mortgage with a 100 per cent offset account linked to it containing a $30,000 deposit, you would only be required to pay interest on $270,000, as the offset amount reduces your principal by the $30,000 held in balance in the savings account.
Another way to calculate offset savings and its effect on your home loan repayments is to take the following example:
- Home valuation – $280,000.
- Loan outstanding – $252,000.
- Monthly repayments on the loan – $1,062.60 a month (5.06 per cent).
- Offset savings account balance $30,000.
- New monthly repayment with offset at 5.06 per cent – $936.10.
How to take full advantage of offset savings on your home loan.
Once you have knowledge of how to calculate offset savings accounts and understand their effect on your home loan repayments you will be in a better position to take full advantage of the set up by paying your complete salary into your offset savings account every pay day. If you do this and leave it be without touching it you will substantially increase your savings balance every month.
You can then live off your credit card by paying all your day to day living expenses until you get to the end of your credit card interest free period. At this stage ensure that you pay out your credit card debt in full from the funds in your offset saving account. Any money not used during the month will remain as further savings and by this time a further salary deposit will have come around so you simply repeat the process.
To have this work properly you must pay off all your credit card debt during the interest free period otherwise it will cost you dearly and totally remove any good work you may have accomplished in the past.
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