WTF is an Offset Account Anyway?!

separator

“Would an offset account be something you would want for your loan?”

A vacant stare occupies my client’s face.  “Has anyone ever explained to you how an offset account works?” I say.

“I’ve heard they’re good. Is it like a credit card to save interest or something?”. They’re floundering a bit.

“Kind of” I say, “I’ll show you how they can help. They can be an awesome tool for saving interest on your home loan over time.”

 

If you would rather pay more on your mortgage than you have to, than get into the nitty gritty of interest saving tips, stop reading now!

 

The short answer is an offset account is an interest saving tool that can shave time and money off the period of your loan.

An offset account is a savings account which is separate to the home loan. No different in most cases than your normal day to day bank account, with a bank card and internet banking etc. Where it does differ is, your offset account is linked to the home loan in the background.

Your offset account can be as simple or complicated as you make it. To understand how it works, lets imagine you have a home loan account showing a balance owing of $100,000. You have saved up $5,000 of your own cash and that’s sitting in your offset account.

The bank acts as though you have paid that $5K off your home loan. That means the bank is only charging you interest on $95,000 instead of $100,000.  So, if your interest rate was 4% you’d be saving $200 per year if that $5K was in your account every day for a year.

 

Remember your interest is always calculated daily.

 

That’s important because if you had $5000 in your account one day, then took it out the next day. You’ve pretty much lost the benefit of the offset account. It’s only saved interest for one day.

You’ve basically eaten the whole box of Tim Tams at once. Tomorrow you’ll be upset because they’re all gone.

We all know lenders love charging fees and most offset accounts are no exception.  The banks know how useful they are and most charge either an annual fee or a monthly fee to let you have one.

But there are some great smaller lenders that don’t charge for these.  Whether you can get OR want a loan from that lender depends on your personal circumstances and the deals they offer.  Either way, when deciding on bigger or smaller lenders, it’s worthwhile working out how much interest you think you’ll save through your offset account versus the fees that a bank will charge you for it.

 

Get smart (and a little sophisticated)

 

You can get pretty sophisticated (and smart) in the way you work your budget using an offset account.

I have a number of clients that have their salary paid directly into their offset account and let all the money sit there for as long as possible. They then use a Credit Card to handle all of their day to day expenses for the month.  Using the 55 day interest free period on their credit card, they swipe and pay wave their way through the month. Then right before the interest period kicks in on the credit card, they pay the balance off with the money in their offset account.

This works well because that money has sat in the offset account for as many days as possible, saving interest each day until the Credit Card needed to be paid out. Rinse and Repeat and that’s a nice set up, IF you are disciplined enough and organised to keep it going.

Others treat the offset account as a savings account for saving up larger sums of money. Simply because you will SAVE more interest in an offset account than you would EARN if you had it in a term deposit or high interest savings account.  You get the exact same benefit by having redraw available on your home loan by the way.

 

In a nutshell.

 

Offset accounts are great if you intend to keep more than $5-10K in your offset account for the long term during each year.  But be aware of your loan size and the fees that the bank is charging.  Whether you need one or not will depend on your personal circumstances and the way you manage your money day to day.

Want to know more about maximising your offset account? Call me anytime you like.

Jonathon Coleman