You’ve probably heard of an offset account and know that lots of people rave about it, but what exactly is a mortgage offset account, and how can it help you? Just like with any big decision, you should always think about your personal circumstances, but to help you out, let’s do a deep dive into the world of offset accounts.
What is a mortgage offset account?
Before we go into too much depth, it’s a good idea to make sure you understand what a mortgage offset account is all about. Basically, it’s an everyday transaction account that you can still use to make regular transactions – so, yes, you can technically have a debit card attached to it1. You can also have your wage or salary deposited into this account, however, you won’t be paid interest on this money. Where an offset account differs to an everyday transaction account is in its purpose – you use it to reduce the interest paid on your home loan, allowing you to pay off your mortgage sooner1.
How exactly does an offset account work?
So, you know you can put money in this account to help you pay off your home loan quicker, but how does this work? Essentially, the balance of the offset account is deducted from the outstanding balance of your home loan when the interest is calculated each month1. As a result, the interest of each mortgage repayment is lower, meaning that more of the money from your repayments is dedicated to paying down your actual home loan1.
Benefits of an offset account
You’ve probably already noticed that there are a lot of benefits of having a mortgage offset account, so let’s go over some of the key ones.
Probably the biggest advantage is that you’ll end up paying less interest on your home loan. This can end up cutting years off your loan, so not only do you pay it down quicker1 but it also means your home officially becomes yours earlier than you would have initially expected.
An offset account also makes your savings work harder. Normal savings accounts mean your money is just sitting there waiting to gradually grow over time with interest and your own contributions. In an offset account, your savings are working for you by serving the purpose of paying down your loan quicker1. Plus, if you’re a high-income earner, your savings can be taxed, but this isn’t the case in an offset account.
Having money set aside that is easily accessible whenever you want or need it is also a good way of covering your bases in case of emergencies1. While you don’t want to get into the habit of dipping into these funds, just like you wouldn’t normally dip into your savings unnecessarily, it’s a back-up option if something goes wrong and you need money fast.
Disadvantages of an offset account
Before you get too carried away, make sure you also take into account the disadvantages of having an offset account. They exist and it’s always a good idea to weigh up both the pros and cons before making a big decision like this.
Mortgage offset accounts can sometimes have limits on everyday transactions (fortunately Queensland Country Bank’s is unlimited). This can change depending on the financial institution, so it’s a good idea to do some research and clarify whether there limits apply or fees could be incurred1.
Given that the purpose of a mortgage offset account is to help you pay down the interest on your home loan, it’s important to maintain funds in this account to ensure you reap the most benefits1. This would require a bit more organisation on your part to remember to keep checking the account balance.
Evidently, there are both benefits and drawbacks to an offset account, so ultimately, it comes down to personal circumstances, much like anything finance-related. It’s worth weighing up both sides of the situation before you make the final decision. Just be sure you lay everything on the table for consideration and seek financial advice if you need more help.
Queensland Country Banks offers a 100 per cent mortgage offset account with both our Standard Variable Rate Home Loan and our Fixed Rate Home Loan.
Review the Home Loans Product Information Brochure and the relevant TMD available at queenslandcountry.bank. Normal lending criteria, terms, conditions and fees apply and are available on request.
General Advice Warning: This information is intended to be general in nature and is not personal financial advice. It does not take into account your objectives, financial situation or needs. Before acting on any information in this article, you should consider the appropriateness of the information provided. In particular, you should seek independent financial advice.
Source:
1Nicola Field, 2022, What is an offset account?, Canstar, https://www.canstar.com.au/home-loans/mortgage-offset-accounts/