If you have a variable rate home loan, it’s likely you’ll have the option of 100% offset. Here we discuss the advantages of offset, and how it can reduce the interest you pay (and help you pay your mortgage off faster). So how does it work? Read on.
The main points of a 100% offset
- 100% offset uses savings in a designated account to ‘offset’ your home loan balance.
- You pay interest on your home loan balance minus the amount in that account.
- Even if your average balance is just a few thousand dollars, it’s worth it.
- Keeping your average savings balance as high as possible saves you more.
- Many people get their wages/salary paid into their offset account.
- It’s a great feature to have with an owner occupied home loan, especially if you intend to rent out that home in the future.
- Ensure you’re not paying too much though on bank annual fees to have this great feature.
- A couple of our lenders even offer a 100% offset feature against their fixed rate home loans.
‘Pay your mortgage off faster’? Seems too good to be true
100% offset links an everyday savings offset account to your variable rate home loan, and uses the money in that account to offset your loan balance. The more money you have in the account; the less interest you pay on your home loan.
Consider this example. You’ve taken out a 25-year mortgage for $320,000. Now suppose you pay an average interest rate of 7.22%. We’re going to assume you have, on average, $10,000 sitting in your linked account (roughly what you’d hope to have as a ‘buffer’). Over the life of your loan, you’d save $46,319. Effectively, you end up paying off your loan sooner – your 25-year mortgage ends 20 months early. Run the numbers through our ‘Home loan offset calculator‘ to workshop other examples if you like. Our calculator lets you customise a loan using several variables (loan amount, term, interest rate, etc.). You can also enter how much (on average) you’ll have in your 100% offset account. This will show you the savings you can make – and how much sooner you could pay off your loan.
Save interest every day
Usually your home loan interest is worked out each day, calculated on the balance of your loan (and then charged monthly). So, every dollar you have in your linked bank account saves you interest every day that it’s there.
Keep as much money in your offset account as you can
Here are two simple ways you can make your offset work better for you.
Have your salary or wages paid into your offset
If your pay goes directly into your offset account, this money immediately reduces the interest you pay on your home loan. Even if it’s only in there for a couple of days, it adds up (note: you can still take your money out as usual).
Use your credit card for everyday purchases
To do this you need to be a disciplined spender and know how much your monthly expenses are. You keep enough money for your expenses (groceries, utility bills, etc.) in your account and instead use your credit card for these. This lets you keep the maximum amount in your account, offsetting interest.
Then, at the end of the month, you transfer the money you have set aside in your account and pay off your credit card balance in full (so all your expenses are paid off and you don’t accrue any credit card interest).
The crucial element of this strategy is this: You must set aside the money for your expenses in your account so you’re able to pay off all those expenses you’ve put onto your credit card at the end of the month. If you’re not able to do this, you’ll end up paying interest on your credit card.
If you’re not disciplined with your credit card, this may not be the best option for you.