23 Apr Advantages of an Offset Account
Advantages of an Offset Account
Over the past decade, home loan products have continued to improve and now there are a range of features you should consider when the time comes to get a home loan.
Arguably the most popular and most helpful is what is known as an offset account. An offset account is much like a regular transaction account that works in conjunction with your home loan account.
An offset account will allow you to save on interest while still having the flexibility to access your cash, if and when you need it. When considering a new home loan, one of the first things you should speak to your mortgage broker in Melbourne about is the possibility of getting an offset account.
The easiest way to understand how an offset account works is to look at an example.
If you have a $500,000 home loan, you will be required to pay the interest on the entire $500,000.
However, if you have a home loan with an offset account attached to it, you will only be charged interest on the difference between the home loan and the offset account.
If you have $50,000 in your offset account, you will be paying interest on the $450,000 balance ($500,000 – $50,000). The real benefit is that you will still have access to that $50,000, just like you would with your everyday transaction account or savings account.
You can even get your income paid directly into the offset account or keep your savings in there as well. By doing this you are effectively saving interest at a faster rate than you would be earning from something like a savings account. In the current low interest rate environment, this is more noticeable than ever for those people that have savings.
The best type of offset account is the 100% offset, which means you will receive the same level of interest that you are paying on your home loan. There are some home loan products that come with something like an 80% offset, but that is clearly not as good.
It’s also possible to use your offset account in conjunction with a credit card to make your money go even further. There is no reason, you can’t put all your monthly expenses on your credit card and let your cash save on interest in your offset account. Then at the end of the month, pay back off your credit card. This will allow you to save interest all month. In a way, the banks are helping pay off your home loan faster.
A common question many first home buyers have is what is the difference between an offset account and a redraw facility?
In effect, they both end up giving you the same result, however, the redraw facility lacks the same amount of flexibility.
If you have a redraw facility, attached to your home loan, any money over and above the minimum repayment amount sits in it and you can access those funds should you need them.
The main issue with a redraw facility is that it is not really set up like a transaction account. In fact, there are usually only a certain amount of withdrawals you can make in a given period of time or you will be charged fees.
At the same time, the ability to redraw is still at the discretion of the lender and theoretically, they could prevent you from doing so – although this is unlikely.
In essence, both an offset account and redraw facility will deliver the same outcome, however, one is far more flexible and user friendly.
When deciding which option is best for you, speak to a mortgage broker in Melbourne to find out which is most suitable for your personal situation. In reality, both options are very good to have and with so many home loan products you should certainly be looking to take advantage of features such as an offset account.