One of the main things you look for when checking out home loan comparisons is the interest rate attached to the loan. As a general rule, a high interest rate means you’ll be paying back a lot more over the lifespan of the loan.
But what if there was a way to decrease the amount of interest you have to pay? That’s where mortgage offset accounts can help.
Offset accounts allow you to match your savings to your home loan, which takes away a chunk of the principal. For example, if you have a $350,000 loan and $50,000 in savings, you can use an offset facility to only pay interest on $300,000 of the home loan.
Beyond that, offset mortgages allow you to use your savings to offset some of the interest you’d pay on a home loan. The interest you earn on your savings gets deducted from the interest accrued on the loan.
Doing this can help you to save thousands of dollars in interest payments, plus you may be able to pay your home loan off quicker.
Use uno's calculator to estimate your savings.
### 100% vs Partial
You may have a choice between a partial offset and 100%-offset when setting up this type of account. A partial offset means that only a portion of the interest on your savings goes toward paying off the interest on the loan. A 100% offset syncs your savings’ interest with the loan’s interest.
Most people go for the 100% option because it’s simpler and leads to larger savings.
Let’s look at an example of how a 100% offset account works. We’ll use the $350,000 loan figure from before and add a 6.5% interest rate to it. The same goes for the $50,000 in savings we used in our previous example.
The interest earned on the savings is about $3,250 a year, or $270 per month, which offsets the interest added to the monthly mortgage payment. That essentially means the monthly mortgage payment lowers by $270.
It sounds like a great deal, but a lot of people choose not to set up a mortgage offset account. The most obvious reason for this is that they don’t have the savings available to do it in the first place. You may have to scrape and claw to get together the money for the deposit, in addition to the extra fees, which leaves little left over to create a mortgage offset account.
Those who do have the money may not use an offset account for other reasons. When you set up an offset account, you link your savings to your home loan. The interest you would have earned on those savings instead goes toward reducing the interest on your loan. This means your saved money doesn’t earn any interest during the course of the mortgage.
However, you’ll often find that the interest saved on your loan outweighs what you would have gained if you left the money in a standard savings account.
Finally, let’s talk about the fees. Many lenders attach monthly or annual fees to their offset accounts. These usually aren’t too high, often coming in at around the $15 to $20 per month mark.