Purchasing a home is undoubtedly a long-term commitment in many aspects, especially if one of those aspects involves taking out a loan. For many, this is one of the biggest expenses they will ever face, and it definitely requires careful consideration.
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Once you decide on taking out a loan, the focal point of your calculations is the interest rate. What may reduce it and save you a substantial amount of money is an offset account. However, you have to factor in all the pros and cons before you opt for having one.
The offset account and its major advantages
The mortgage offset account functions as any other bank account, except it is linked to your home loan. You’ll receive a debit card which you can use to make everyday purchases. It will allow for your salary to be deposited directly into the account and you can arrange direct debits for any kind of bills. So, it’s a bank account linked to your mortgage, but how does it work? Its purpose is simple – to reduce the interest on your loan. The balance in your offset account is offset every day against the home loan principal. For example, if you have a $300.000 loan and $50.000 in an offset account, you will only pay interest for the difference of the two, $250.000 to be more exact. So, if you maintain a sufficient balance in your offset account, not only will you be able to save a great deal of money, you will also pay off the mortgage early.
Besides these perks, there are several more that add to its appeal. These accounts are extremely flexible, and the majority of them let you deposit and withdraw funds whenever you like. This is most helpful if your financial situation fluctuates or in case something unexpected happens.
The interest is calculated on a daily basis, so no matter how much or how often you save, you will always benefit from the account’s features. What’s more, when it comes to saving, it is much more efficient to save via an offset account than an online savings account. Online savings accounts earn less interest than the amount of interest offset accounts deduct from your mortgage. Since these kinds of savings are not classified as income, you will not have to pay any tax.
But is it the best option for you?
On the other hand, as appealing as it may seem, having an offset account may not be something that will facilitate the payment of your interest rate. There might even be a higher rate involved because most home loan providers charge higher interest rates on mortgages that are linked to an offset account. This means that in order to reap all the benefits this type of account can offer, you have to make sure you deposit enough money. There may also be fees for monthly account maintenance as well as withdrawals.
Basically, the higher the amount, the greater the benefits. If you cannot manage to deposit a substantial sum, the advantages will be minimal. Also, you have to keep in mind that you always have to maintain a positive balance, which some with less income, may find difficult.
Before you decide on an offset account, it is advisable that you do a fair amount of research and calculate whether it pays off or not. In order for it to work to your advantage, you have to primarily have and maintain a larger sum of money in it, keep in mind that there might be monthly fees involved and that you may be charged for withdrawals. Furthermore, don’t forget that each lender offers a different type of account, with different benefits and limitations.
There are specific situations in which you may find this arrangement unsuitable. For instance, if you want to increase your equity or reduce your loan repayments. But for some, this is an option which will save both time and money. Whatever the case may be, make sure that your decision makes financial sense. Read through all the terms and conditions before you sign on the dotted line.