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What is an Offset Account?
Published by Scott Miller
Structuring your mortgage in the right way can help you save thousands on repayments and take years off the repayment time. We love helping people plan out different ways to structure their mortgage that might help them pay it off faster or easier, and an offset account is one such tactic.
In this article, we will explore what a mortgage offset account is, how it works, and the pros and cons of using one.
What is a Mortgage Offset Account?
A mortgage offset account is part of your mortgage that is linked to all of your everyday transactional and savings accounts.
The balance in the offset account is used to reduce the amount of interest you pay to your lender, and instead you pay to yourself. Essentially, the funds in your bank accounts are used to offset the interest of your mortgage. This can result in significant savings on your mortgage interest payments over time.
How Does a Mortgage Offset Account Work?
When you have a mortgage offset account, the balance in your bank accounts is used to offset the interest payable of your mortgage.
For example, if you have a $50,000.00 offset account and have $50,000.00 in your bank accounts, the interest component of your repayment is paid you instead of the bank and reduces the principal of your loan balance. This means that the more money you have in your offset account, the less interest you pay to your lender.
Advantages of an Offset Account
- Paying your loan off quicker
The primary advantage of an offset account is that it can significantly reduce the amount of time it takes to pay off your mortgage. By offsetting the balance of your mortgage, you can save thousands of dollars in interest payments over the life of your loan. - Increased flexibility
With an offset account, you have the flexibility to access your funds whenever you need them as they remain your normal everyday accounts. Unlike other mortgage accounts, you are not locked into a fixed term or penalty fees for early repayment.
Disadvantages of an Offset Account
- Higher interest rate
Mortgage offset accounts often come with higher interest rate as the account is placed on the floating or variable interest rate. This is why it is important to align the limit of your Offset account with the ‘likely’ balance of your combined transactional and savings accounts. - Complexity
The mechanics of a mortgage offset account are different to what most mortgage holders are used to. It can take some time to understand the workings of an Offset account, before understanding the true advantages this type of mortgage offers. It’s important to ask your financial adviser how this type of account works before committing to one. - Not all New Zealand banks offer this as an option
If your bank does not offer this as an option and you want to use this tactic, you may need to move your mortgage to a bank that does offer it. It is best to ask your financial advisor or bank manager if this is an option that is available to you.
Conclusion
A mortgage offset account can be a great way to reduce the amount of interest you pay to your mortgage provider. However, it’s important to weigh the advantages and disadvantages before making a decision. If you’re unsure whether a mortgage offset account is right for you, it’s best to seek the advice of a financial professional.
If you’re interested in learning more about mortgage offset accounts and how they could benefit you, we encourage you to reach out to us today. Advanced Mortgage Solutions can help you determine if a mortgage offset account is the right choice for you, and guide you through the process of setting one up.
Don't wait, start exploring your options and take control of your financial future now!