Blog Paying off your mortgage vs using an offset

Paying off your mortgage vs using an offset

26 October 2020
Paying off your mortgage vs using an offset

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Mortgages typically run from 25 to 30 years. Reducing the length of your loan can drastically reduce the amount of interest you pay, potentially saving you thousands. But is it more advantageous to pay off your mortgage or use an offset account? We’ll take you through the benefits of both, and how to decide which may work best in your situation.

What is an offset account?

An offset account is very similar to a normal transaction account, in that you can withdraw and deposit money from it. The key difference is the money in an offset account is offset against your mortgage balance. Essentially, the more money in your offset, the less interest you’re charged. This will reduce the length of the loan as more of your repayments go to paying off the principal, rather than interest.

To put into numerical terms, if you had a $500,000 home loan and $50,000 in an offset account, you’d only be charged interest on $450,000 of the loan.

Why pay off more of your mortgage than is required?

Mortgage repayments are typically calculated on the minimum amount needed to be repaid each month. Often, people will simply pay this amount and ‘set and forget’. But paying off more than the minimum can greatly reduce the interest you end up paying as you’re shortening the length of the loan.

Additionally, paying off your mortgage in a lump sum, if you had a windfall of cash, for example, would have the same effect.

Benefits of an offset account

Some of the benefits of an offset account include:

  • Accessibility to access the money whenever you wish

  • Could reduce the length of your loan saving you thousands on interest

  • Often no withdrawal fees

Benefits of paying off your mortgage

Benefits of paying off more of your mortgage include:

  • Shortening the length of your loan and saving you thousands on interest

  • Making larger repayments for a long period of time means you could have cheap repayments down the track

  • Unlimited extra repayments are commonplace

How to decide what works for you

Having an offset account or paying off your mortgage both have their advantages, but one is likely to be better for you based on your personal circumstance.

An offset account is great for people looking for flexibility, particularly people who are making the often harsh change from rental to mortgage repayments. An offset account is great for someone who may not have a large disposable income and may need to access the cash in their offset account but still wants to save on interest. It’s often recommended you deposit your salary straight into your offset account and use it as your main transaction account. It’s also great to use as an emergency fund, or if you’re saving for a holiday or another big expense.

Paying off more than the minimum is great for people who might have a higher disposable income and have had their home loan for a few years. It’s important to analyse your budget and ensure you have enough cash flow to support this strategy though because once you’ve made the extra payments it’s unlikely the lender will return them should you need to. The advantage of extra repayments is if for whatever reason, you want to stop, you can simply revert to the minimum for as long as you need, and you’ve still saved yourself on interest costs.

Using an offset with loans.com.au

We’ve recently launched our Smart Booster Home Loan, Australia’s first-ever variable owner-occupied home loan with a rate under 2.00% p.a. The 1.99% p.a. introductory variable rate (2.47% p.a. comparison rate) is available for one year before reverting to a rate of 2.48% p.a. In addition to this, we’re also offering a two year discounted variable rate of 2.09% p.a. (2.71% comparison rate).

Both loans come with the option to add a redraw offset facility for just 10 basis points and also offer the ability to make unlimited additional payments.

Both loans are available to borrowers with a Loan to Value Ratio (LVR) of up to 80% and have a maximum loan amount of $1,000,000.

Calculate how much you could save over time by using a redraw offset facility to pay off your home loan faster here. Alternatively, get started on your home loan journey with us by qualifying below.

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