Offset Accounts & Extra Repayments to Your Home Loan
Offset accounts are a very popular option with home loan borrowers and for very good reason.
Let’s start with how they work…………
Offset accounts are set up much the same way a traditional savings account and the account holder can literally transact through it as you would with a traditional savings account. But they have a very important difference. That is, the bank does not pay you interest on any money held within the Offset Account, instead, the equivalent amount of your home loan is actually interest free.
For example if you have a $200,000 Home Loan and $20,000 deposited to a linked offset account,
the first $20,000 of your home loan will be interest-free with only the last $180,000 of your Home Loan accruing interest at the contracted rate.
This provides a two very key benefits………
The first benefit being that the effective return on the money held within the Offset Account is much greater than what is widely available in most interest-baring accounts.
For example, if your contracted home loan rate was 6.00%, that means you would actually be getting a 6.00% return on the money held within your Offset Account. Even though rates has increased lately this is well above that commonly available in traditional savings accounts.
The second main benefit is the fact that this benefit is tax-free. This is because the ATO only taxes you on interest physically paid to you, the ATO does not tax you on interest that a bank doesn’t charge you on your Home Loan.
These reasons have seen offset accounts prove very popular with self-employed borrowers due to the ability to “park” in the Offset Ac surplus funds set aside for GST that is payable at a later date. Effectively this sees the GST money that you have to pay at a later date working for you in reducing your home loan costs.
Unfortunately not all lenders offer an Offset Account. In this case another way to accelerate the reduction to your Home Loan is by making additional repayments direct to the loan itself.
Making extra payments to your home loan can be a very clever financial strategy, it can not only speed up the time it takes to pay off the loan but depending on the size of your loan to start with it could save you thousands of dollars over the course of the loan.
However this can only be done effectively if you’ve got the right type of loan that allows for these additional repayments.
Most borrowers will over the course of their careers find themselves earning more as the years roll by so it’s important to consider what type of loan will suit you best if you intend to make extra repayments, not just now but down the track.
Generally speaking, most variable rate loans on offer will allow for extra repayments but the ability to do so with fixed rate loans will usually be heavily restricted, if allowed at all.
If allowed, should your circumstances change and you need to access the funds that you’ve paid in
advance, most lenders will allow this against variable rate loan.
So if you intend on paying more than your monthly minimum be it now or down the track
please ensure the ability to do so is factored into your home loan structure from the start.
It’s a lot to take into account and this is why discussing your current needs and also your future needs with a quality Finance Broker is integral to ensure that your long-term goals are taken into account, and, that they’re achievable under the home loan you end up taking out
Accountplan’s own Mick Doyle has over 35 years in the Australian finance industry and is MFAA accredited. Feel free to call us on 07 3883 8999 and allow Mick to provide you with knowledgeable advice to suit your own circumstances.