If you want to pay off your mortgage sooner, a home loan with an offset facility can be a quick and simple option.
How it works
A mortgage offset account is simply a savings account linked to your loan account. Unlike an all-in-one loan that combines your credit card with your transaction accounts, an offset account works like a regular savings account. The big difference is that the balance in the savings account is offset against that owing on the mortgage. Any ‘notional’ interest on savings is earned at the same rate as the linked loan.
Over time, savings in your offset account can help to reduce the loan principal, allowing you to pay off your loan sooner or build up equity.
Types of offset accounts
There are two different types of offset accounts – a 100 per cent offset and a partial offset account. As the benefits of offset accounts have become more widely understood, most lenders and borrowers opt for a 100 per cent offset facility.
John and Betty have a $100,000 mortgage and $10,000 in a linked 100 per cent offset account.
- The principal on a $100,000 loan is reduced by the $10,000 offset account to $90,000.
- As a result interest only accumulates on the $90,000 balance of the loan.
- Repayments continue to be made on the entire $100,000 principal and applicable interest.
- While savings in the offset account are actively working to reduce the loan, repayments are working more effectively to reduce both the principal and interest it attracts
- Over a number of years, both the principal and interest on your loan are repaid faster.
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