When it comes to mortgages (and trying to pay them off), it’s not all about the rate. It’s about at what rate you pay it off.
Other than finding forgotten coins in the couch, getting paid more, or hoping for that inheritance from Aunt Lucy, there are ways we can pay the mortgage off faster. The right mortgage structure can make a big difference – one which allows us to be smarter with our money.
An offset home loan structure is one that, in many cases, can help pay off your mortgage sooner using your existing money. Your salary, savings and any extra funds you stumble across will ‘offset’ your interest – meaning you pay zero interest on the amount in your bank accounts. Often all it takes is a dose of discipline and a little know-how.
How does an offset mortgage work?
An offset mortgage account allows you to allocate a number of bank accounts to be offset against the balance of your mortgage.
You only pay interest on the balance of your mortgage minus the balance of your offset accounts. This is instead of paying interest on your home loan, whilst earning interest on your savings.
For example, if you have a mortgage of $250,000 and $10,000 across savings and day-to-day accounts, you will only pay interest on $240,000 of your mortgage.
Pay less interest and pay off your mortgage faster
Total home loan amount: $250,000
Current savings: $10,000
Average balance of everyday accounts: $1,000
Intended extra monthly savings: $300
Time shaved off mortgage: 7 years, 3 months
Interest saved over term: $57,187
Flexibility of finances
With an offset home loan, you can use designated saving funds to save interest before spending it. Saving for that trip to Paris in two years? Have it offsetting your mortgage while you plan and save for your dream trip. Have a decent emergency fund that you’re not sure if you’ll need or not? Have it offsetting your mortgage, and only pay interest on funds used.
No fixed term
Ability to update your structure as your needs change.
Focus on saving as well as paying off your mortgage
If you’ve got plans to save big in the near future, it can be worth anticipating your savings balance and allow for a big enough offset loan to make the most of zero interest.
Sounds too good to be true? We wouldn’t say there’s a catch, but there are a few things to consider:
You don't earn interest on savings
You save on home loan interest instead of earning interest on any savings. But since a home loan rate is often higher than any savings interest rate, it’s usually smarter use of our money.
It will only work with discipline
Because your own bank balance is offsetting the interest, the funds are available to spend at any time (unlike making fixed loan repayments). You’ll begin paying interest on any offset money spent.
Higher interest rate for any difference
It has a higher interest rate than fixed – although this is only relevant to any difference between your accounts and offset loan amount. So it’s important to work out how much of your loan to put on offset, and anticipate the balance of your accounts in the short-term future (an Apex mortgage specialist can help)
Wondering if an offset home loan can get your mortgage paid off faster? A quick chat with an Apex mortgage specialist can help determine if your situation would benefit from an offset facility, how much you should consider offsetting, and how much money it could save you!
Check out the video below for a quick run-down on how offset mortgages work: