How to use an offset account to reduce your home loan
Offset accounts are excellent tools to use in line with your home loan. Firstly, what is an offset account? Essentially it is like a bank account tacked onto the side of your home loan. All money that you have within there, reduces your technical loan balance meaning you only pay interest on the rest.
The benefit of this type of account is that if you need the funds you can withdraw them, just like a normal bank account.
So, how do I use an offset account to get ahead?Well, I have previously written about how I split my finances into 3 areas. 1 areas is for everyday expenses like groceries, petrol and entertainment money. The 2nd area goes towards longer term, yearly or quarterly expenses like electricity bills, holidays and Christmas gifts. The 3rd area goes towards savings and investments.If you use the offset account to hold the majority of your money for 2nd & 3rd areas, you will be saving for the important things, but you will also be reducing the interest that you pay on your home loan in the interim.It is more beneficial than a high interest bank account. Most high interest bank accounts will be paying around the 2.5% to 3% maximum at the moment. Most home loan interest rates are about 4.5% so it’s more beneficial to reduce the interest repayments for you. Over time it will make a big difference.
There is probably only 1 major downfall with this kind of strategy and it is for people who struggle to control themselves on the spending side of things. If you know that there is a large sum of money sitting in a bank account, you may be more inclined to rack up your credit card knowing that you will be able to pay it off.
If however you are the type of person who can detach the emotion from your finances, then this is a perfect way to have enough money for your ongoing expenses, whilst reducing the interest you pay on probably the biggest loan you will ever have.
If you are in the market for a home loan, then definitely ask about getting an offset account. If you have a home loan and don’t have one, then you should consider talking to a mortgage broker or your bank manager to see whether they can find you a better deal and save you some money along the way.
This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.