Opinion
So you’ve got an offset account, but are you using it wisely?
Dominic Powell
Money EditorReal Money, a free weekly newsletter giving expert tips on how to save, invest and make the most of your money, is sent every Sunday. You’re reading an excerpt − sign up to get the whole newsletter in your inbox.
For those who are lucky/privileged enough to have one, there’s a lot to like about owning your own home. Having a roof over your head is pretty cool, and being part of the Australian property market is ... fine, I guess. But one thing they don’t warn you about is how much you have to talk (and think) about your damn mortgage.
For something that feels like it should be “set and forget”, the nagging questions are near constant. What rate are you on? Should you switch to a different lender? Should you contribute more/less to your monthly repayments? Do you have an offset account? What even is an offset account?
Plenty of people have mortgage offset accounts, but many don’t know how to maximise their potential.Credit: Aresna Villanueva
Those last two questions are what I’m hoping to shed some light on, along with some ways you can get the absolute most out of your offset (if you have one) and save money on your mortgage each month.
To start, an offset account is a transaction account that’s linked to your home loan. Any money you keep in that account is offset against your mortgage, reducing the amount of interest you pay, and you can access all the money in your offset account whenever you want, without restriction.
Offset accounts are popular in Australia, with homeowners squirrelling away a whopping $257 billion in offsets as of December last year in an effort to buffer against potential future rate rises. Part of this boom can also be attributed to many people rolling off the ultra-low fixed rates of the pandemic, as many fixed rate home loans do not offer offset accounts.
What’s the problem?
Despite their popularity, it’s likely many of us aren’t using offset accounts to their full potential, missing out on significant home loan savings both in the short and long term.
What you can do about it
Here are some things you could be doing:
- From farm to table: One of the simplest and most effective ways to make your offset account work harder is to organise with your workplace to have your salary (and that of your partner) paid directly into the account. This both maximises the amount you have in your offset (and therefore the reduction in your interest bill) and does not rely on you moving the money across yourself. As interest on offset accounts is calculated daily, delaying or forgetting to transfer your funds can have an impact. Additionally, keeping all your money in an offset account can save you tax, as offsets do not generate interest like normal savings accounts do – interest that adds to your taxable income.
- Use a credit card: If you want to take it one step further, verified offset account guru Nicole Pedersen-McKinnon, a regular contributor to our Money section and author of How to Get Mortgage-Free Like Me, says there’s one strategy that helped her pay off her first home loan in just seven years. “My offset-strategy-on-steroids is to get paid into an offset and leave it there for a month while living instead off a credit card with a long interest-free period. If you pay the credit card bill from your offset account only when it’s due, every month you are using the bank’s money for free to slash your mortgage,” she says. This strategy does require you to be diligent with repaying your credit card, but Pedersen-McKinnon says it can save you tens of thousands of dollars over the course of your loan.
- Save diligently: It may be a bit unexciting, but one of the best ways to maximise your offset’s effect is to have as much money in it as you can. Richard Whitten, home loans expert at Finder, says it’s best to keep it simple and regular when it comes to offsets. “Plan to set aside some savings each month and put it in your offset. Let it build up over time. Instead of earning interest, you’ll shorten your loan term and get out of debt faster,” he says. “The ultimate way to get the most out of your offset account is to save as much as you can, as early as you can. Your home loan will probably be with you for decades, and putting money in the offset from the start gives that money more time to work for you.”
- Check your rates: Importantly, make sure you’re not paying for the privilege of having an offset account. Check the rate on your mortgage to make sure it’s competitive, as paying a higher interest rate for a loan with an offset will probably end up costing you more than what you will save by having the account.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.