Recently a friend of mine visited their new accountant (mine), who came highly recommended. My accountant is a great chap who offers a joke across the desk and makes accounting well…more fun. My friend was happy to discover the drive was well worth it and called me on the way back to thank me and tell me a bottle of wine was on the way – nice!
Anyway – there were some key messages hanging off my accountant’s (and now my friend’s new accountant’s) lips, and one of those words was ‘offset account.’
And this got me thinking. I’ve heard people talk about their offset accounts but lots of people I know don’t really know what an offset account is or even why they have one. So, I decided to hunt down an easy-to-digest explanation for my readers.
Rather than try to explain this concept myself, I’ve called on my friend Matt Grayson over at Premier Choice Home Loans. He’s an expert at this stuff and he’s given me the explanation in plain English, which is always refreshing.
Read on to discover what on Earth an offset account is and how one can help you.
Thanks Matt! Over to you…
What is an offset account?
In simple terms, an offset account is basically a savings account linked to your home loan. The money in this account is offset against your loan balance. For example, if your home loan balance was $300,000 and you had $10,000 in your offset account, you would only pay interest on $290,000.
Now, before you jump in the air clapping and cheering (you will do this later), your loan payment will stay THE SAME, HOWEVER, the portion of interest you pay in each repayment will DECREASE. A simple illustration of this is below:
You can see above that for the period of the loan, that total loan payment stays the same (in this example, $2147 per month), however, the more you have in your offset account, the less interest is being paid. This means more principal is being paid and therefore, your home loan will be paid off sooner.
Most people have no idea why they have an offset account
To be honest, 95% of people who have an offset account either don’t know how to use it correctly, or are oblivious to what it can actually do for them.
Most people pay the $10 per month account fees to use the offset facility, and expect it to magically work by itself. It’s almost like those who have gym memberships. Just because they have one, they subconsciously think that they are going to get fit or lose weight, but it doesn’t work that way. Most things in life take a little discipline and a bit of hard work!
There are many financial institutions out there, showing that if you have $X amount in your offset account over the life of the loan, you will save $X amount in interest and save X amount of years off your loan. As you may or may not know, interest is calculated daily on most of your loans, so thinking about it logically, it would be great to understand the effect the offset account would have in YOUR day-to-day life, correct?
Thanks for that Matt!
Help is at hand via some useful online tools
My friend Matt has some tools that can help you too. He’s put together an opt- in series so you can see first-hand how powerful your offset account can be if you use it in your everyday life.
In one of his examples, he shows how a family of four, can pay off their $300,000, (25 year home loan), in just 10.5 years with a little discipline. You may read this and think, “well they must be earning HEAPS of money” Well, they’re actually not. One adult is working full time, earning $65,000, and the other part time, earning $25,000. All it is, is learning how to make your money work for you, and not for the bank!
Free video series
To access Matt’s video series all you need to do is enter your name and email address. You won’t be spammed and you’ll reap the benefits by gaining priority access to any future material days or weeks before the resources are released to the public. If you like what you see – and I must say I LOVE the material, Matt can call you for a no-obligation chat about how you can use your an offset account in your own personal situation. Matt also releases plenty of other general finance tips and tricks, aside from home loan tips so this is worth signing up for.
Get in touch with my friend Matt
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