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Your complete guide to offset accounts.
Navigating the world of home loans can be complicated, but one feature that can save you both time and money is an offset account. Here at The Newstead Group, we believe that understanding your mortgage options should be as straightforward as possible. In this blog post, we'll explore what offset accounts are, how they work, how you can leverage them to your advantage, and alternatives if an offset account doesn’t align with your needs.
What Are Offset Accounts?
In essence, an offset account is a transaction account linked to your home loan. The more money you have in this account, the less interest you accrue on your loan. Some people keep their funds in a savings account to earn interest, but many find it more beneficial to reduce the interest on
their mortgage through an offset account.
How Do Offset Accounts Work?
When you opt for an offset account, the amount in it is directly linked to your home loan. The interest for your loan is calculated based on the loan amount minus the money in your offset account. So, if you have a $500,000 loan and $50,000 in your offset account, you'll only pay interest on $450,000.
It is important to note that interest is calculated daily and charged monthly. This allows you to benefit from keeping as much money as possible in your offset account each day. Over time, this can result in substantial savings.
To better understand how an offset account can suit you in varying financial situations consider these scenarios:
Example 1:
Consider this: You have recently made a significant purchase and have minimal funds left, say $3,000. You might be wondering if there is much point in opening an offset account, since you have minimal saving to put in. However, say you save $250 per week. That’s an additional $13,000 a year that could better serve you in an offset account rather than a low-interest savings account.
Example 2:
Another strategy is to have your pay go directly into your offset account. Use a credit card for daily expenses, then pay off the credit card every month. This method allows you to maximise the amount in your offset account, reducing your interest even further.
Downsides of Offset Accounts
While offset accounts are amazing, don’t expect them to work their financial wonders for free. There's often a fee, but for many, the benefits outweigh the costs. It's all about understanding the trade-offs! Fees can range from a few dollars a month up to $400 per year, depending on the lender. Some might say it's a small price to pay for the big bucks you'll save in interest, but it's definitely something to consider.
How Can We Negate This Fee?
To make the most of an offset account, there are a couple of strategies to take into consideration:
1. Cost-Value Ratio: Take a look at the benefits that come with your offset account package. These may include credit cards with no annual fees, insurance discounts, and more, which can compensate the cost of the account itself.
2. Calculation: There is a specific amount you should ideally have in your offset account to negate the fees effectively. Usually, a figure like $10,000 serves as an
excellent emergency fund and a reasonable amount to offset the annual fee cost.
3. High-Interest Rates: When interest rates are high, it takes less in your offset account to negate the fee. This is because the money in the offset account will be offsetting a larger amount of interest.
Do Offset Offerings Vary from Lender to Lender?
Yes, offset accounts can differ widely between lenders. Some offer single offset accounts, while others offer joint accounts for couples. A variety of lenders even offer multiple offset accounts, up to 8-10, which is ideal for segregating funds for everyday expenses, bulk savings, and more.
Alternative to Offset Accounts:
Still not sure if you want to opt for an offset? You may want to consider a:
Redraw Facility: A redraw facility is a feature offered in some mortgage plans that allows you to make extra payments toward your loan, above the minimum required amount. Later, if you find yourself in need of cash, you can redraw or withdraw these extra payments. Essentially, it provides a way for you to pay down your mortgage more quickly, while still giving you the flexibility to access those additional funds if needed.
o Pros/Cons: This facility provides similar benefits to an offset account, by reducing the interest payments. However, there may be various fees or restrictions for redrawing funds.
So, there you have it! Offset accounts can be a powerful tool in your mortgage strategy however, they come with their own set of considerations, such as fees and minimum balance requirements. We gain true satisfaction from helping our clients alike yourself, so if you have any questions about offset accounts or any other mortgage-related queries, please do not hesitate to reach out to us or give us a call.
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