Exploit mortgage offset accounts to better many your finances and save more money

There are heaps of home loan offset accounts on the market that can help you better manage your finances and save money.

Andrea Welsh and Lee Coulthard. Picture: Josh Woning

The single biggest financial burden for Australians is their home mortgage but many are still not taking advantage of offset accounts to save thousands of dollars.

Squirreling money into an offset account, which is an everyday bank account that is linked to your home loan, is a great way to reduce the amount of interest you pay over time and helps organise your finances better and save more.

An offset account allows you to deposit your salary and savings, and the total balance is then offset against the amount you owe on your home loan.

So what are the benefits? We asked the experts:

HOW IT WORKS

Depending on the lender, you can have several offset accounts to help better budget your finances and you can access that money at any time.

They are similar to mortgage redraw facilities, however the later is just a way to take out any extra money you might have paid into your loan. Most lenders will let customers access the money, although some do charge a fee and there are other withdrawal restrictions in place.

Around half of the home loans in the market offer an offset account, while 79 per cent offer a redraw facility, according to comparison website RateCity.com.au’s database.

HOW IT HELPS YOU BUDGET

Offset accounts can also be a great budgeting tool to help save for a big-ticket items such as a renovation or a holiday, particularly if your bank lets your have multiple accounts, according to RateCity’s Sally Tindall.

“Having multiple offset accounts is a neat way to divide up your spare cash into specific purposes or goals helping you see exactly how much money you’ve saved for each purpose – every time you log in to your bank,” Tindall says.

Andrea Welsh and Lee Coulthard. Picture:Josh Woning

If you have a $500,000 mortgage and put a lump sum of $50,000 in your offset account, you only pay interest on $450,000, potentially saving you up to $61,500 over a 30 year loan term.

Andrea Welsh recently bought a new house with her partner Lee Coulthard and has got more savvy about using an offset account, in her case eight now from one.

The 45-year-old customer service manager already had a fixed mortgage with CBA and one offset account when the pair decided to buy a new home together.

They got a new mortgage with CBA, which is split between variable and fixed, because she already banked with them and the rates on offer were very competitive. But she now has eight offset accounts to help better manage her finances.

YOU PAY LESS INTEREST

ING Australia’s head of home loans Julie-Anne Bosich says you can “save money and shave time off your loan” with an interest offset account linked to your mortgage.

For example, a $500,000 home loan over 30 years at an interest rate of 2.54 per cent, plus $10,000 in an offset account for the entirety of the loan term, may save you several thousand dollars.

“You could potentially save $11,189.67 in interest and shave five months off the payment period of your loan. This estimate does not take into account likely interest rate changes over the entire loan term, nor any fees that may be payable,” Bosich says.

“I’ve always had an offset account but I’ve never really kind of understood how they worked way back when,” says Welsh, who has two sons, Kyren and Slayter.

“So this time around we’ve had the offset account just to reduce the interest on the home loan a little bit. I’ve also split mine out to a number of accounts to help with budgeting.”

Welsh’s eight offset accounts consist of home loan repayment, education, allowance, transport, utilities registration, insurance and internet and phone.

“I funnel money into those accounts, and then have all of my bills and stuff come out of those. But also then the money that sits in there and accrues throughout will offset the home loan as well, so getting dual benefit,” Welsh says.

She believes most people who are “a bit money savvy” know how offset accounts work, but she’s not so sure that new home buyers are across it as much.

A spokesman for Commonwealth Bank says having an offset account linked to your home loan could help you pay less interest over time.

“Placing funds in an offset account is a great way to reduce the amount of interest you pay on your loan while retaining the ability to access those funds at any time in the future,” he says.