When applying for a home loan with an offset facility, is it better to put extra payments direct into the mortgage or into the offset account?
What is an Offset Account?
An offset account is one of the most powerful ways to save you a couple of years and hundreds of thousands of dollars over the lifetime of your loan. It is actually easy to have an offset account and the benefits to you is great. Your salary or wages can be used in offsetting your loan. Here, every cent in your offset account works to help you pay down your loan faster. Most offset accounts calculate interests on a daily basis.
It is a normal transaction or savings account that is linked to your home loan. Every dollar that you have on that account reduces the interest charged on the loan by offsetting the credit balance against your loan. Hence the term offset account.
How does an offset account work to my advantage?
A typical client with a $500,000 home loan, paying 7% interest with a loan period of over 25 years could potentially save $187,800 in interest. They could also reduce their loan term to 17 years and 8 months, instead of the 24 year period.
When you link an account to your home loan, the money on that offset account enables you to have every cent of your money working to reduce the interest on your loan instead of sitting idly in your bank account. The interests are calculated daily so the longer you can leave your money untouched, the better, as this will reduce the loan interest charged accordingly.
Reduce the interest you pay and the term of your loan with an AMO 100% offset account
AMO offers offset accounts for any worthwhile purpose such as owner occupied or investment loans.
It’s not just the home loan borrowers that can have an offset account. PAYG borrowers (Pay As You Go) or self-employed borrowers can also apply for an offset account.
Unlike other companies with short terms on their offset products, AMO has a 30 year term, which means more financial freedom for borrower. For example, a $2,000,000 loan on a 10 year term, will have monthly repayments of around $21,203. With the same amount of loan on a 30 year term, your monthly repayments would be considerably less at around $10,724, allowing you to stretch your budget to cover other expenses things.
Making Additional Repayments
You would usually see this with variable home loans only, but with AMO, it is possible to make additional repayments on your loan. Additional repayments help our clients with budgeting, that is if they can make additional repayments now and build up a reserve, they don’t have to worry about making monthly repayments if that want to use their savings for a trip or family holiday.
The other great advantage of an offset account is that it can act like your regular bank account, only it is linked to a loan. In case you need money for an emergency, you can always redraw the additional funds in your offset. It’s just like putting money into your bank account.
On top of having your loan linked with an offset account. You have the freedom to decide which portion of the loan would be assigned as a fixed home loan and which is a variable home loan. It can be 50:50, 70:30, or 60:40.
AMO gives you access to your offset account with card access. The account is identical to a standard savings accounts, and you will receive card access for electronic transfers and be able to withdraw money from ATMs as you please.
A mortgage offset account is a great way to pay off your home loan sooner, and if you're a good saver and watch your budget, having an offset account can help you to cut years off your home loan. However, if you tend to spend most of what you earn or put very little in your offset account, you may be better off with a basic home loan.
You will need to weigh up the pros and cons, and carefully consider your spending habits and consider if an offset account is right for your situation.
If you are unsure about what to do, speak with your accountant or give AMO a call on 133 266 or book a free appointment with one of our qualified mortgage consultant.