Many variable rate package or fully featured home loans come with an “offset account”. This is simply a bank account which has some sorts of transaction facilities attached, such as a debit card or EFTPOS card. The real beauty of an offset account however, is not the convenience it offers, but the fact that every dollar in the account reduces interest on your home loan by offsetting the total mortgage debt by the amount in your offset account. It is the net amount of your total mortgage debt and offset account on which the lender will charge interest.
For example most offset accounts offer a 100% offset, so if you had $15,000 sitting in your offset account and your home loan had an interest rate of 4%, you would effectively be avoiding a 4% per annum interest charge on $15,000, or saving $600 each year of the home loan. This may not seem like much, but over a 30 year loan the savings can add up to tens, even hundreds, of thousands of dollars if you keep adding funds to the balance of your offset account over the years.
The best time to add extra money to your offset account is at the start of the loan, yet this is often the time at which we struggle to meet the minimum repayments. You may be young, and it may be your first mortgage.
Your salary may be only just enough to pay the mortgage and still put petrol in the tank, but by using the methods outlined below you can still benefit substantially by living out of your offset account.
In doing this you are offsetting your home loan interest to the maximum degree possible, rather than a few days later when you get around to transferring the funds to your offset account. Best of all, it happens automatically, so you don’t even have to think about it! it’s an automatic savings plan, and it’s working to pay off your home loan sooner, and with less effort!
This strategy is only for those who have no debt on their credit card/s, are conscientious with their spending and are confident they can pay off the entire balance every month!
By paying for everything on credit, you can extend the time in which money is sitting in your offset account. So instead of paying the utilities bills by BPAY, cheque or direct debits, or your groceries by debit card or cash, if you put these costs on your credit card that money stays in your offset account and earns you interest for another month.
For example, if you spend $3,000 a month on expenses, and your offset account earns 4% interest, you'll save around $10 a month by paying for everything on credit and keeping that $3,000 in the offset account for an extra month, until the credit card bill is due. This will also see your credit card reward points rack up much faster. Disciplined financial management is required here though as you do need to have the money in the Offset Account to pay the credit card bill at the end of the month and avoid interest charges.
If you can pay off your credit card balance in full every month, then there is another way to maximise your credit card rewards, and that is to minimise the use of cash.
While we are not yet a cashless society, you can pay for most things on the plastic and in doing so maximise the time your cash is earning you interest in your offset account, and at the same time earning you reward points. So now you know how to save on home loan interest by living out of your offset account. But if you’re still paying interest on your credit card, all your good intentions could be in vain.
To put it simply, paying off your credit card in full every month using BPAY or direct debit from your offset account should be a top priority. Your credit card interest rate will be far higher than your home loan rate, so keeping that credit card debt interest-free is essential.
Paying your everyday expenses on your credit card has a secondary benefit. Not only does it increase the balance in your offset account temporarily and save you interest on your home loan, you also earn credit card reward points.
You should compare credit card rewards and sign up for the card and program that suits your spending habits. At the end of the year you could end up with hundreds of dollars' worth of rewards, and that could be put back into your offset account in the form of ‘cashback’ rewards offered on some credit cards, or converted to flights or food vouchers. Any benefits that you would have otherwise paid for allows you to direct those savings into your home loan offset account. There are a multitude of rewards on offer and there is no reason not to make the most of the reward programs on offer. In most professional package loans, the fee-free credit card is provided as one of the benefits of the loan package.