There’s a common misconception around offset account home loans that making loan repayments more frequently helps to pay off the balance much sooner. We bust that myth and reveal the real secret to harnessing the power of your offset account.
You may have heard that making repayments more frequently, say weekly instead of monthly, helps pay down a loan sooner.
That can be the case with a standard home loan.
But if you have an offset account home loan, the secret to paying off your loan sooner is maximising the balance of the linked offset account.
Let’s look at how this works.
Paying weekly or fortnightly versus monthly
A common hack to save on home loan interest is to pay half your monthly loan repayment each fortnight. Or a quarter of your monthly repayment each week.
The idea is that by paying that respective amount weekly or fortnightly, you’ll make the equivalent of an extra month’s repayment each year.
It’s a simple strategy, and the hope is that you don’t really notice the extra cash being funnelled towards your home loan.
However, if you have an offset home loan, the frequency of repayments is less important.
What really matters is having as much spare cash as possible sitting in the linked offset account – or accounts.
How to harness the power of your offset account
An offset account is an everyday account linked to your home loan.
For the purpose of monthly interest calculations, every dollar in the offset account is deducted from the balance of your loan – usually calculated on a daily basis.
So if you have $20,000 in the offset account and a home loan of $500,000, you only pay interest on $480,000 ($500,000 less $20,000).
It makes an offset account a powerful tool to reduce the loan interest you pay each month.
Better still, as your loan repayments stay the same every month, a greater proportion of your repayment goes towards paying down the loan balance (principle), rather than interest.
This further reduces each monthly interest charge.
In this way, your offset account can help you fast-track your way to mortgage freedom.
Making the most of an offset account
The golden rule to maximising the interest savings of an offset account is to keep as much money in your offset as possible. And some home loans even let you have multiple offset accounts.
Every day that your money is sitting in an offset account is another day you pay less interest on your home loan.
If you can tick this box, you’ll be using an offset account effectively, and the frequency of your home loan repayments won’t really matter.
Want to know more about offset account home loans?
Offset account home loans can come in different shapes and sizes. Some only allow you to link one offset account, with others you can link many accounts, and you may also be able to attach a debit card to your offset account/s.
If you’d like help figuring out what offset loan might be a good fit for you, get in touch today.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
