Offset Account: A Must Have For Your Mortgage

   

If you have a homeloan / mortgage account, and especially if you are on variable rate, one thing that you MUST have is offset account facility. Usually homeloan product that offer this facility will attract annual fee for the convenience, but it’s absolutely essential and worth it. Let us see why exactly it is in this article.

How It Works

As the name implied, if you have offset account, amount of money that you put on that account will offset / reduce the actual homeloan. For example: say you have $300,000 homeloan and it has offset account linked to this homeloan. Then if you put $10,000 inside that offset account, the interest of your homeloan  is no longer $300,000, but it’s now $290,000.

So, with interest of 6%, amount of $10,000 above will save you interest payment of $10,000 x 6% = $600. So, it doesn;t matter if the company charge you $250 per year for that facility, you still end up with more saving.

But of course you will not find this facility on fix term interest rate mortgage as it has fix repayment as well.

What is The Benefit

The actual benefit is enormous. Let say you won a small lottery prize of $5000 or your employer give you a bonus this month fr $5000. Well, the general wisdom will be to try to pay off the mortgage as soon as possible, so you are considering this $5k for extra repayment for the mortgage. But… you also remember that you need to have emergency cash for financial protection that can support you for rainy days. At the moment you hardly have this ‘emergency’ saving. So, you’re also considering this option to put the amount aside for emergency purposes.

Well, if you don’t have offset account facility, you will end up with splitting the amount. Maybe $2500 for extra mortgage repayment, and the other $2500 will be put aside for emergency. Or any other composition you think the best.

But now, if you do have offset account, you simply put that extra money into this offset account. And not only you will reduce the calculation of the interest by $5000 (the exact same effect if you pay extra $5000 into the homeloan account), but also you can make the money (all $5000) as your emergency cash, as the offset account is usually just another saving account that ‘linked’ to the main homeloan account.

So, just by having this facility you virtually ‘doubled’ your money: $5000 for extra mortgage ‘repayment’ and another $5000 for part of your emergency money.

A Few Tips

Other tips that you can do if you have offset account:

• Ask you employer to transfer the salary directly to this account. As you know the interest payment calculation is based on daily balance. If the salary or other payment is transferred directly to this account, there will be 1 or 2 day that the full amount of that transfer being used to offset the mortgage (before you use most of the amount to pay other bill). In this case, you really maximizing the saving on the interest.
  For example: if your $1500 salary is paid fortnightly (hence 26 occasions), assuming interest rate is 6%  and each of the occasion it sits there for 2 days, then you make yourself roughly a saving of $1500 x 6% x (26 x 2)/365 = $13. Well, not much, but it did not cost you a cent to make this saving, so it’s still a good saving.
• Make sure your annual fee is being “paid” by this offset account facility. For example: if you have $250 yearly fee and 6% interest, then your need to put in the account at least $250 / 6% = $4167 for the whole year. If you do that, the saving of the interest repayment will be greater than the annual fee that they charge. In other word, technically you have “free” annual fee.
• Pay your monthly credit card bill and other bill just 1 or 2 days before the due date. Make your money stay as long as possible in this offset account. Remember there is no reward if you pay the bill 1 week in advance, but if you put the money in your offset account, that 1 week give you additional saving for the next interest repayment.
• If you have a social gathering or similar occasion in restaurant or cinema or anywhere else, volunteer yourself to pay collectively (while the other pay you the cash) with your credit card. Then put the cash on your offset account. When the credit card is due, pay it off as usual. Not only you will earn more point on your credit card, but you have additional saving on your mortgage.

What To Do

If you currently don’t have offset account facility, just try to call your lender whether they can easily add this facility immediately even for a small fee. Otherwise, make sure you have this one on the next refinance / remortgage.

If you have one, then make sure you reap the maximum benefit as suggested above.  Well, at least make your annual fee of the account “free”.

Related Posts

• Taking a mortgage ? Do Not Change Your Lifestyle Dramatically
• Be Careful With “Interest Only” Homeloan/ Mortgage: a Potential Problem You Should Know
• Getting Your First Home Loan or Mortgage: Not That Hard!
• Why You Should Always Use Mortgage Broker For Your Homeloan
• Mortgage: Change To Fixed Rate or Keep It Variable ?

Denis Kristanda  

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