To offset, or not to offset...

To offset, or not to offset...

...that is the question. Well, likely the second question. The first is more than likely to be "What is an offset account?".

You're sitting down with your broker (or your lender, if you still haven't jumped on the broker train) and they start throwing all these optional extras at you for your home loan, making what is an already an overwhelming experience even more overwhelming. While the broker or bank may know what they are talking about, don’t feel alone if you don’t. One of the big extra features that can come with a loan is an offset account.

Not sure exactly what that is? Well then, let us break it down for you.

What is an offset account? It sounds like a glorified bank account!

Well, technically it is. However, unlike your regular savings accounts, this is an account that is linked directly to your mortgage account. Any funds in the offset account “offset” (hence the name) your home loan - meaning they contribute to your paying off your home loan.

Let's say you have a home loan of $200,000, and have sitting in your offset account $100,000. If this offset is a 100% balance offset account, then you will only pay interest on $100,000 of your home loan rather then the full $200,000.

So is it worth having one?

This is really dependent on you. If you intend to use your offset as a transaction account and have all your incoming funds going into that account, plus keep your savings or "rainy day" funds in there, you could make significant savings in terms of smaller interest payments.

We even have a cool little Home Loan Offset Calculator that could show you the sort of savings you could make on interest payments with an offset account. Give it a try with the figures above and see what we mean!

Huge savings probably sounds like a given the above. However, depending on the lender or package you go with, you may be charged an annual fee. If you aren’t great at holding money in a account for an extended period of time, you may find that the cost of this fee in the long run actually eliminates any savings you could have made.

So to offset or not to offset, that is your question to answer.

Posted in Money Musings on Thursday 24th May, 2018