Are you using your mortgage offset account wisely?
When you’re trying to manage a mortgage effectively, that usually involves making strategic decisions about your current finances. This is especially true when it comes to using an offset account and making extra repayments. But, have you wondered what would happen if you had more money in your offset account than your current loan balance? Well, at Kaleido we get asked that question a lot, so we decided to give you an answer as well. We’ll explore the impact of having more money in your offset account and we will try to help you understand the financial implications so that you can make well-informed financial decisions.
Offset Account vs Extra Repayments
If you want to pay off your mortgage early, you’ll typically have the option to use your funds and choose to do extra repayments or add them to an offset account. Most people wonder whether it’s a better idea to put extra money in an offset account or deposit it in the form of additional mortgage repayment. An important thing to keep in mind is that your offset account is a sort of savings accounts that is linked to your home loan. Whatever balance is on that account, it directly offsets the amount you owe on your loan, reducing the interest charged. Here’s a simple example so that you can understand it better. If you have a $500,000 mortgage and you have $100,000 in your offset account, you will only pay interest on $400,000.
Now, on the other hand, you can make extra repayments which directly reduce your loan principal. This usually means that you would pay less home loan interest over time and eventually pay off your loan amount faster. Additionally, extra repayments can bring a very profitable return by reducing the interest and the time you’d need to pay off your loan. This is especially true for variable rate home loans, where paying off the loan can take much less time than usual. There is a big difference between these two options and that’s accessibility. Whatever balance you have in your offset transaction account, it is readily available for withdrawal, whereas any extra repayments made are inaccessible and are used to reduce your mortgage debt.
When you can choose between these two options, it’s important to know what your financial goals and needs are. If you require flexibility or liquidity, decide an offset account to reduce the amount of interest on your home loan rate. Or, you can choose extra repayments, which are considered a better option for a lengthier loan since they reduce home loan interest rates and reduce how long you have to do monthly repayments.
Can I Offset 100% of My Mortgage?
This is a question we get asked a lot and the answer is YES, you can definitely do that. For that to work, you’d need to have a balance in your offset account that equals or exceeds your outstanding loan balance. This way you won’t pay any interest on your loan. This works because the interest payment is calculated on the “net balance” which is your mortgage minus your offset account balance. Do keep in mind that even though you can completely negate interest payments, having an adequate amount of money in your offset account won’t help you pay off your home loan faster since you still need to make regular loan repayments which are used for paying down the principal.
Is It Better to Pay Off a Loan or Put Money in an Offset?
To give an accurate answer to this question, you first need to figure out your current financial situation as well as long-term financial plans. For example, as we mentioned previously, the balance that you have in an offset account is usually available all the time and you can use that money for whatever you need at that time. This offers flexibility and it allows you to access extra cash whenever you need it, which can be quite useful for emergencies or future investments.
If you’re someone who wants to focus on a sort of financial freedom and being debt-free, then paying off a loan should be your number one priority. It doesn’t matter if you have a car loan, home loan or similar, your goal can be to pay it off as soon as possible. But, if you’re looking to mitigate interest payments on an existing loan, then having money in your offset account should be the choice for you. Both options can be beneficial, but you need to prioritise and see which option works best for you. If you aren’t sure, or you have questions, feel free to reach out to us at Kaleido and let us help you make a well-informed decision.
Maximum Amount in Offset Account
Since the balance of your offset accounts isn’t locked and the balance in them can be used for anything you want, they usually do not have a maximum amount or limit on how much money you can have in them. With that in mind, we also advise you to consider other investment opportunities rather than having large sums of cash in an offset account. These types of accounts only reduce the amount of interest you pay on your mortgage, but they do not earn any interest themselves. Even though you have unrestricted access to your money, by having larger sums on these accounts, you are potentially missing out on returns from other types of investments.
It’s important to learn how to balance both offset and regular accounts, as well as any investments you might have. Optimise your financial strategy and keep enough in your offset to reduce loan interest and use the rest for investing. By doing this, you should be able to find the right balance and potentially find the best and most profitable approach.
What Happens If I Have More Funds in An Offset Account Than Loan?
If possible, try to avoid this because having more money in your offset account than your current loan balance will not provide any benefits. You can’t reduce your interest beyond 100% and any excess money on that account will not earn any interest. The best thing you could do is remove any excess amount and invest it into other ventures, or put it in a special account where it can increase with interest. Additionally, even if you have excess money in your offset account you will still have to make regular payments that cover your principal.
Paying no additional interest is a good financial decision, but a better one would be to consider other alternatives where you’d be able to gain a profit and eventually use that profit to pay off your loan completely. We suggest you try out the saving goal calculator, which can help you decide how much you should deposit in your account. You can check it out here. Understand the whole financial impact of having more money in your offset account than your loan. Use this knowledge to strategically manage your finances, optimise interest savings, and achieve your financial goals.
