Managing finances can be challenging, especially with the current cost of living pressures. However, if you have some savings alongside a home loan, there's a strategy to maximize your surplus funds.
Have you considered utilising an offset account?
Offset accounts are increasingly favored as an additional feature for home loans, evidenced by recent data revealing a significant surge in homeowners depositing funds into these accounts in Queensland, Brisbane, the Gold Coast, and Townsville.
Statistics indicate that balances in offset accounts have reached 11% of credit limits, marking the highest proportion since APRA began tracking this metric in March 2019.
This implies that, on average, individuals with offset accounts are effectively paying interest on only 89% of their mortgage each month in these regions.
But how exactly do offset accounts function within home loans in Australia?
An offset account is essentially a cash account linked to your mortgage.
Unlike standard savings accounts, the bank doesn't provide interest on the offset account balance. Instead, the balance is subtracted from your home loan balance when calculating loan interest.
For instance, if you have $20,000 in an offset account and a $615,000 home loan (roughly the average size of new mortgages nationwide), the lender would charge interest only on $595,000 ($615,000 - $20,000).
Consequently, this leads to lower monthly interest payments, while maintaining consistent loan repayment amounts. Additionally, a larger portion of each payment goes towards reducing the loan principal, further reducing future interest costs.
In essence, offset accounts enable borrowers to tilt the mortgage balance in their favor, saving on interest and potentially paying off their loan sooner.
What's driving the current popularity of offset accounts?
In large part, the increasing popularity of offset accounts can be attributed to high interest rates.
Moreover, since no interest is earned on the offset account balance, there's no tax implication, unlike with separate savings accounts where high-income earners could face significant tax deductions on interest earnings.
Furthermore, considering that home loan interest rates are typically higher than savings account returns, offset accounts allow borrowers to maximize their savings by reducing loan interest more effectively than with standard savings accounts.
Additionally, some lenders offer the flexibility of multiple offset accounts (complete with debit cards) linked to a single home loan, enabling borrowers to optimize the utilization of their funds.
Factors to weigh when considering offset accounts in Townsville It's crucial to recognize that funds deposited into an offset account could alternatively be invested elsewhere, prompting a consideration of whether accelerating home loan repayment or investing in other assets offers better returns.
Moreover, ensuring you secure a competitive home loan interest rate is essential, as offset home loans may entail fees and/or higher interest rates compared to conventional loans.
Lastly, it's worth noting that offset accounts are generally incompatible with fixed-rate home loans. However, options exist to structure your home loan with a combination of fixed and variable rates, allowing for an offset account attachment to the variable portion.
Consulting with Premium Finance Group Australia, your mortgage broker in Queensland, Brisbane, the Gold Coast, and Townsville, regarding your home loan requirements is advisable. We can leverage our extensive network of lenders to identify a loan tailored to your needs and explore whether an offset account aligns with your financial goals.
To learn more, contact Premium Finance Group Australia, your finance broker in Queensland, Brisbane, the Gold Coast, and Townsville, at 1800 413 635 or email us at finance@pfga.com.au
Disclaimer: The content of this article is general 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 situation and may not be relevant to circumstances. Before taking any action, consider your 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.
