With many of us struggling with high inflation and interest rates, here are some ways to make savings on your mortgage.
Mortgage offset accounts
A mortgage offset account is simply a savings account tied to a mortgage. These accounts have some unique features and can deliver significant savings on the regular interest you pay on your mortgage. The main benefit relates to the ‘offset’ advantage. Savings held in your offset account reduce the principal of the loan when interest is calculated. For example, if you have a loan balance of $250,000 and an offset account balance of $30,000 then interest is applied to only $220,000. As interest is usually calculated on a daily balance, maintaining a higher offset account balance from day-to-day provides immediate benefit.
But offset accounts are usually used as transactional accounts, so balances fluctuate as deposits and withdrawals are made. Holders of offset accounts often have salaries credited directly to their account and then withdraw amounts to meet expenses. Disciplined savers will still gain interest savings daily and over the longer term. An offset account can deliver large interest savings and therefore shorten the term of the loan.
Consider a new loan of $600,000, an average interest rate of 5% and a starting loan term of 30 years. An offset account maintains a balance of $40,000 over the term of the loan.
Over the term of the loan, interest saved would be just over $121,000. The loan term would be reduced by just over three years.
Whilst offset accounts have advantages, they will probably come at a cost by way of fees or by an increase in the interest rate applied. It is important to ensure that these extra costs are considered before deciding if an offset account will work effectively for you.
Many mortgage accounts (usually variable rate accounts) will allow you to make an additional loan repayment over and above regular payments. This reduction in the principal of the loan will also result in lower interest payments. In these circumstances, it is usually possible to later withdraw some or all the extra payments that have been paid.
Keep in mind, too, that for both offset and redraw accounts you are saving on interest but not actually earning interest, so there are no adverse taxation implications.
Both offset accounts and redraw accounts can save on interest payments, but their features and costs differ. To choose either requires careful consideration based on personal objectives.
Note: This article is in no way intended to provide you with personal advice and you should discuss your own financial circumstances with a qualified financial adviser before committing to any decision on matters raised in this article.