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The key benefit of an offset account is that the money you put into it will reduce the amount of interest you pay on your mortgage. For many people, that means putting a lump sum into the account and never touching it.
But what if you had your salary going directly into the offset account? This hands-on strategy gives you a way to do that by using a credit card with interest-free days to pay for all your monthly expenses. Then, at the end of each month, you would use the money in the offset account to pay your mortgage and credit card balance.
Interested in seeing if this offset account hack will work for you? Let's take a look at what's involved.
An offset account is a type of transaction account that is linked to a mortgage – more commonly a variable rate loan than a fixed rate one. The balance of this account is weighed against the amount of money owed on your home loan, reducing the interest that you pay.
For example, if you had a $300,000 home loan and an offset account with a $50,000 balance, you would only be charged interest on $250,000 of your home loan. If the interest rate was 2.80% p.a., this could save you $54,747 over the life of a 30-year loan. It could also cut 3 years and 8 months off the life of the loan.
While the terms and conditions do vary, this type of account can help you save both time and money on your mortgage.
If you're in the market for a new home loan, you can compare ones that come with an offset account. If you already have a home loan, ask your provider if it's possible to add an offset account, or consider refinancing to a loan that gives you this option.
This lump sum becomes the baseline for saving money on your home loan through this account. In general, it's ideal to deposit a large lump sum so that you can start seeing savings on your home loan straight away, but the priority should be to put in an amount that you can afford to keep there long-term (i.e. savings).
This step saves you time on manually transferring your income after each payday, and it means that you can maximise the savings you get from having your income deposited into the offset account.
To do this, you will need to provide your employer and/or payroll team with the following details:
Usually, you can update these details by filling out a short form (either printed or online), but it's worth checking with your employer on the preferred process.
Go through your everyday bank statement or use a free budget planner to estimate your monthly spending. This includes supermarket shopping, transport and utilities, as well as non-essentials such as streaming subscriptions, gym memberships and dining out.
With this strategy, the goal is to keep your salary in the offset account for as long as possible, so aim to be as detailed as possible when you work out your monthly spending. However, do not include your mortgage payments in the budget, as these will come directly from the offset account (more on that in step 6).
The key to making this strategy work is to get a credit card with interest-free days and then pay off the entire outstanding balance by the due date on each statement. This allows you to use the card for everyday spending without being charged interest on the balance.
Ideally, you should get a credit card with a limit that lets you pay for all your monthly expenses without tempting you to overspend. For example, if you typically spend between $1,000 and $2,000 per month, requesting a credit limit of around the same amount will give you enough funds to cover your everyday spending.
When your mortgage payment is due, pay it directly from the offset account. Note that your repayment amounts should stay the same when you use this strategy, but you will be charged less interest based on the daily balance of your offset account.
This means that using this strategy can save you money on interest charges each month, even when your repayments reduce the offset account balance until your next payday.
Use the salary that you deposit into the offset account to pay your credit card statement's balance. For this strategy to be effective, you need to pay the total amount that is listed on your statement before the due date. Otherwise, interest charges on your credit card could undo the benefits you get from having money in your offset account.
It's also a good idea to make this payment several days before the due date on your statement, just in case it takes a few days for the transfer to be processed.
To put this plan into perspective financially, let's say you have a home loan of $300,000 over 30 years and an interest rate of 2.80%. You also have $20,000 as an initial deposit for your offset account. This means that interest on your loan principal would be calculated on $280,000 instead of the full $300,000 borrowed.
In this scenario, you earn $1,000 a week after tax and have this money deposited directly into your offset account. This means that your loan principal would be offset by another $1,000 every week.
Offset account balance | Balance your mortgage interest is calculated on | |
---|---|---|
Week 1 | $21,000 | $279,000 |
Week 2 | $22,000 | $278,000 |
Week 3 | $23,000 | $277,000 |
Week 4 | $24,000 | $276,000 |
At the end of each month, you would take money from your offset account to cover your monthly mortgage repayments.
You would also take money from the account to pay your credit card balance in full. Depending on your card and the number of interest-free days available, this could be around the same time you make your mortgage payment, or 1-2 weeks later.
When you make these payments, the offset account balance will drop back down towards the original $20,000 balance before being built back up as more pay is deposited into the account.
If you're interested in how much value you could potentially get by using this strategy, you can also use the mortgage offset calculator below to get an idea of the potential savings based on different offset account balances.
You can use almost any type of credit card for this plan. But there are three major factors to consider before you choose one:
This is essential, as interest charges could cancel out or even outweigh the potential savings you could make by using this strategy.
Credit card providers can only offer a credit limit that you could afford to pay off over a three-year period. This calculation is based on factors including your income, debt and other financial circumstances.
Considering this strategy requires a credit limit that fits with your monthly spending, in most cases, the limit you require will fit within these guidelines. But you may want to request a specific limit based on your budget to help you stick to it – and to reduce the risk of credit card debt.
As an added bonus, if the limit is lower than your regular income and expenses, it could help you gradually build up more savings in the offset account.
Some cards won't allow BPAY payments and some treat these kinds of transactions in the same way as cash advances. But you can sometimes avoid these issues by paying your bills through direct debit, PayPal or an online platform such as CommBank BPoint.
Check with your credit card provider and look at the payment options available for your regular monthly bills to see what will work. If you can't use your credit card without being charged interest, you will need to pay from your offset account and factor that into your monthly budget.
To clearly explain this strategy, we have focused on how it works for an individual. If you're repaying a mortgage with someone else – and you both earn an income – you could consider the following options:
Ultimately, the way you use this strategy with a partner will depend on both of your circumstances and goals. Discussing your options in detail before taking any action will ensure that you and your partner are both on the same page in terms of the benefits and ongoing commitment involved in this repayment strategy.
Your next step will depend on your current situation, so here are a few examples of what you could do to get started with this strategy.
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