How To Make The Most Of Your Offset Account

Linking your home loan to an offset account can help you shave years off the loan term and thousands, or even tens of thousands, of dollars off the final amount payable on your mortgage, thanks to the reductions in interest.

Choosing the right offset account

Like all bank accounts, offset accounts come in different flavours. So, you’ll need to make sure that the one attached to your prospective mortgage has everything you want. Here’s what to check for when weighing your options.

Fees and charges

An offset account is a bank account, so there will almost always be some fees and charges attached. These shouldn’t be too onerous, given that your lender should aim to offer you a competitive mortgage package, consisting of only an annual or small monthly account-keeping fee. Still, you’ll want to know exactly what the fees and charges are so you can do some calculations to see how much these fees eat into your savings and whether you could do better with another lender.

Interest rate

Ensure that your interest rate is the standard variable rate and no more than that.

Full or partial offset

A 100% offset account, also known as a full offset account, offsets the entire amount in your offset account against your entire mortgage debt, whereas a partial offset account only offsets some of your debt for interest purposes. You should always opt for the full offset account to derive maximum benefit, though this may attract more in the way of fees. Check the terms and conditions and run through some numbers to see how the difference between the two affects your overall mortgage. You should also be clear from the start when discussing your mortgage with a lender that you require a 100% offset account, not a partial one.

» MORE: Can you have multiple offset accounts?

Access to funds

One reason for taking out an offset account is to have access to your funds in the same way that you would with a normal bank account. If you don’t trust your ability to save the money in the account and are likely to go on a spending spree periodically, you may want to go down the redraw facility route instead. In this case, you still achieve the desired interest rate reductions but can’t get your hands on the money as easily.

» MORE: How to choose between a redraw facility and an offset account

Balance and withdrawal limits

Some lenders have limits on the amounts you can deposit and withdraw from your offset account without attracting charges. So, once again, it pays to read the fine print to ensure you don’t get any nasty surprises.

Maximising your offset account’s potential

Once your offset account is set up, you can realise its potential with the following strategies:

Deposit your salary

Arrange to have your salary deposited directly into your offset account. This way, it can go to work immediately, reducing your interest burden, as opposed to languishing in an everyday account, where it may earn less than 1% in interest. Just make sure to weigh the pros and cons of salary sacrificing first.

Put every incoming dollar into your account

Don’t just stop with your wages. Put every incoming dollar into your offset account, including tax returns, bonuses, inheritances, share dividends — basically, any extra money that you can comfortably spare at the time.

Every dollar that goes into your account now means less to pay down the track.

Stick to your budget

Be as disciplined as possible with your budget and finances so you aren’t dipping unnecessarily into your account. Remember, the longer you can leave the money in the account, the less interest you pay, which will allow you to pay off your mortgage faster.

Use a credit card to defer expenses

This strategy is tricky and definitely only for the financially disciplined who knows how to use a credit card responsibly. The trick with an offset account is to keep as much money as possible in it for as long as possible. So, if you can pay for everyday expenses with a credit card and pay off the monthly bill in full inside the interest-free payment period, you’ll save more in the long run.

Of course, this implies that you can always pay off the card within the interest-free period because credit card interest rates are considerably higher than what you’ll find on your mortgage.