What Is an Offset Mortgage: A Guide to Saving on Your Home Loan

Are you looking for a way to reduce the amount of interest you pay on your mortgage and potentially pay off your home loan faster? If so, an offset mortgage may be the solution you’re looking for. In this article, we will explain what an offset mortgage is, how it works, and the benefits and considerations of this type of mortgage product.

What is an Offset Mortgage?

An offset mortgage is a unique type of mortgage product that combines a traditional mortgage with a savings or deposit account. The idea behind an offset mortgage is simple: instead of earning interest on your savings, the balance in your savings account is offset against the outstanding balance of your mortgage.

This means that you only pay interest on the difference between your mortgage balance and the amount in your offset account.

How Does an Offset Mortgage Work?

To understand how an offset mortgage works, let’s consider an example. Suppose you have a mortgage of $500,000 and $50,000 in your offset account. With an offset mortgage, the interest charged on your home loan would be calculated based on the difference between the two balances ($500,000 – $50,000 = $450,000). This means you would only pay interest on $450,000 instead of the full $500,000.

By reducing the effective mortgage balance on which interest is calculated, an offset mortgage can potentially save you money on interest payments over the life of your mortgage. This can result in lower monthly mortgage payments or a shorter mortgage term.

Benefits of an Offset Mortgage

1. Interest Savings

One of the primary benefits of an offset mortgage is the potential to save money on interest payments. Since the balance in your offset account is offset against your mortgage balance, you only pay interest on the difference. This can lead to significant interest savings over the life of your mortgage.

2. Faster Mortgage Repayment

By reducing the amount of interest, you pay on your mortgage, an offset mortgage can help you pay off your home loan faster. With more of your monthly payments going towards paying off the principal, you can build equity in your home more quickly and potentially become mortgage-free sooner.

3. Flexibility and Access to Funds

Another advantage of an offset mortgage is the flexibility and access to funds it provides. Unlike some other types of mortgages, an offset mortgage allows you to access your savings whenever you need them without penalty. This can be particularly useful in emergencies or when you want to take advantage of investment opportunities.

Considerations of an Offset Mortgage

While an offset mortgage offers numerous benefits, there are a few considerations to keep in mind:

1. Higher Interest Rates

Offset mortgages often come with higher interest rates compared to standard mortgages. It’s important to compare interest rates and carefully consider whether the interest savings from the offset account outweigh the higher interest rate you may pay. i.e. if you are not offsetting a sufficient value, from time to time, then the equation in terms of cost-benefit of offset mortgages, may not work in your favour, due to the typically higher cost of floating debt versus fixed rates (although this is not always true with floating versus fixed rates, particularly in recessive times and as an example the fairly recent GCC back in 2008 whereby floating rates did drop further than fixed rates at the time).

2. Fees and Charges

Some offset mortgages may come with higher fees and charges, including annual fees, establishment fees, and ongoing fees. It’s essential to compare the costs associated with different offset mortgages and ensure that the savings from the offset account offset these fees.

3. Cash back values (gifts from the bank for doing business with them)

Each lender that offers offset mortgage, may or may not lower a cashback that would usually be offered should your lending have been fixed when proceeding with a loan structure with them i.e. cashback may not be offered for a new purchase or refinancing with a bank, as the bank has the potential to make very little, if no direct profit on an offset mortgage, that is fully offset. This area can be explained further by your competent financial adviser.

How to Make the Most of an Offset Mortgage

To make the most of an offset mortgage, consider the following tips:

1. Maintain Sufficient Funds

You must maintain sufficient funds in your offset account to maximise the interest savings. The more money you have in your offset account, the greater the reduction in interest costs.

2. Regularly Review Your Offset Account

As your financial situation changes, reviewing your offset account regularly is important. If you receive a lump sum payment or have extra savings, consider depositing them into your offset account to reduce interest payments further.

3. Seek Professional Advice

Before committing to an offset mortgage, it’s advisable to seek professional advice from mortgage advisers. They can help you understand the terms and features of different offset mortgages, assess your financial goals and circumstances, and guide you in making an informed decision. This is where we come in at RSFA to help; contact us to make an appointment.

*An offset mortgage offers an innovative way to save money on interest payments and potentially pay off your mortgage faster. By linking a savings or deposit account to your mortgage, you can reduce the amount of interest you pay and have the flexibility to access your funds when needed. However, carefully considering your own individual needs and future ambitions, as well as the interest rates, fees, and eligibility requirements associated with offset mortgages is crucial. Seeking professional advice is always recommended to ensure that an offset mortgage aligns with your financial goals and circumstances.