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How a mortgage offset account can save you $63,544

Offset accounts are extremely valuable, but be wary of 'fake' ones

If ever there was a time to stage a home loan fightback, it’s now. My modelling shows that, as a function of higher property prices versus the average income, we are now as stretched and as mortgage stressed as people were in the 1980s - when rates reached 18 per cent.

In my last column, I wrote about the clever refinance strategy the average Aussie could use to pay $300,000 less in interest on a typical $600,000 mortgage. And they can also add $63,544 to that interest saving – free – by smartly working an offset account.

Here are the details of how and why an offset account is the most powerful way of paying off your mortgage faster, easier and cheaper.

Compilation image of houses, people standing on the street and Nicole Pedersen-Mckinnon headshot as she talks mortgage offset
Nicole Pedersen-Mckinnon's mortgage offset tips could save mortgage holders a small fortune. (Source: Yahoo Finance AU/supplied) (Samantha Menzies)

Why you should always keep money in an offset

An offset account is like a savings account but one that is hooked to your home loan. Every dollar you house in an offset account is, yes, offset against the balance on your mortgage – or your principal. It is mathematically identical to keeping money directly in your loan but far better.

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You see, there is a concern if you hold extra money directly in your loan – rather than in a separate offset account alongside it - that if you get into financial strife, a lender can refuse your redraw request.

You also need to know there are a lot of ‘fake’ offsets accounts out there – offsets that are really redraws in disguise. This is key: An offset account can only be issued by an authorised deposit-taking institution – in other words, an APRA-regulated one - no matter what a lender tells you. And note that only real deals are covered by the Australian government deposit guarantee of up to $250,000.

Also by Nicole Pedersen-McKinnon:

So, now that we have covered off the important safety reason to use an offset account, and not rely on being able to make a redraw, just how do you make the savings?

The big savings on offer from your offset

The beauty of an offset is that it lets you deploy all your dollars for debt-reduction. So, any savings for a holiday, furniture, school fees, can all be mobilised to slash your mortgage. You should also – ideally – have a 'Holy Shit' fund of preferably six months’ salary, in case things go wrong. You guessed it: That, too, should go in your offset account.

But if you have none of the above (resolve to start slowly building a Holy Shit fund), you can still sit your whole household salary against the mortgage for the month. You do this by putting all your expenses on a credit card, clearing that credit card from your offset account only when the bill is due. The key is that you pay no interest on the credit card and, of course, spend no more than you otherwise would. Otherwise, you’ll go backwards!

And the point is to go forwards: you can turn $20,000 sitting in your offsets at all times into $63,544 in interest savings. Better still, you will get out of debt 1.5 years early. If you’re not sure where to start looking for variable-rate loans with a genuine offset account? Here are today’s best-of-breed products:

Australia's best-value home loans

Owner-Occupier Variable with offset account held with an Authorised Deposit-taking Institution

Lender

Home Loan

Variable Rate

Comparison Rate

The Capricornian

Country to Coast Variable Rate Offset Home Loan

5.69%

5.69%

Tiimely (formerly Tic:Toc)

Variable Home Loan

5.69%

5.70%

Qantas Money

Variable Home Loan

5.78%

5.84%

Aussie

Elevate

5.84%

5.88%

Australian Mutual Bank

GumLeaf Standard Variable

5.89%

5.91%

Police Credit Union

The Better Home Loan Special Offer

5.89%

5.95%

Qudos Bank

Low Cost Home Loan

5.89%

6.08%

Source: mozo.com.au as at November 21, 2023, leading variable rates for owner-occupier, principal & interest home loans at $400,000, 80 per cent LVR with an offset account available with an ADI.

WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

Implement your mortgage-freedom strategy today.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

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