What Is a Mortgage Offset Account?

Whether you’re a first-time homeowner or looking for an upgrade, understanding the differences between types of home loans is imperative. There are numerous types of home loans, with each varying in interest rates and monthly payments. 

A mortgage offset account can help homebuyers reduce the interest charged on their home loan and allows account holders to access money when needed. So, what exactly is a mortgage offset account, and how do they work?

What is an offset account?

An offset mortgage account is a transaction account connected to a home loan. Like a traditional transaction account, offset account holders can deposit or withdraw cash at any time.

The main difference between an offset account and a traditional transaction account is that an offset account can reduce the amount of interest charged on your home loan. Holding money in an offset account can help you pay off your home loan sooner and accrue less interest. The higher the balance in your account and the longer you keep the money in the account, the less interest you’ll be charged on your home loan.

In most cases, offset accounts are only available for home loans with variable interest rates. However, some lenders allow homeowners to open an offset account for fixed-rate home loans.

How do offset accounts work?

When a homeowner opens a mortgage offset account, they’re only charged interest on the net balance of their home loan. The net balance of a home loan equates to the loan balance subtracted from the amount in the redraw offset facility or offset account. 

For example, if you have $10,000 in an offset account and owe $200,000 in your mortgage, the interest on the home loan will be calculated on $190,000. Essentially, in the case of 100% offset accounts, the balance in your offset account is deducted from the balance of your home loan.

Opening a mortgage offset account does not change your monthly repayments. However, more of your repayments will go toward paying the principal balance of your home loan, rather than the interest accrued. Mortgage offset accounts help homeowners pay off their mortgage faster while accruing less interest and allow homeowners to access the money in their offset account at any time.

What are the benefits of an offset account?

Holding money in your offset mortgage account can save you thousands of dollars and can shorten your home loan repayment period by years. For example, if you take out a home loan at $400,000 with a 5 percent interest rate and a loan period of 30 years, storing $10,000 in your offset account for 30 years can save you more than $30,000 in accrued interest. Along with saving money, you’ll reduce your repayment period by a year.

Is an offset account right for you?

Although there are many benefits of an offset account, homeowners should review their current financial situation before opening an account. If you plan to regularly deposit and withdraw money, an offset account can give you immediate access to your cash. However, many lenders charge to open an offset account. 

In some cases, homeowners are charged a monthly fee, while other lenders charge an annual package fee. Consequently, homeowners should consider whether saving interest will be more beneficial than paying account fees.

If you own a home and you’re planning to move soon, an offset account may not be for you. Instead, a simple google search like “Sell My House Fast California” can connect you to companies that make the process of buying and selling a home easy. Because selling your home “as is” can provide you with immediate cash to use toward your next home loan, you’ll start with a lower loan balance and you won’t be charged as much interest.

Opening a mortgage offset account can reduce the amount of interest accrued on your home loan and help shorten your repayment period. Ultimately, whether opening an offset account is the right choice for you depends on your financial situation.

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