If you owe $300,000 and you have an average balance of $10,000 in your Offset Account, your lender only charges you interest on the difference, $290,000. At a 7% interest rate, that would save you $700 per year. This can have a significant impact on your loan in the long term.
If you could keep $30,000 in an Offset Account, you would save $153,661 in interest over the life of your loan (and you still have your $30,000).
The alternative would be to have $30,000 sitting in a savings account earning interest. For the sake of comparison, let us say you were earning 5% in a savings account (which is considered income and is taxable). If you were taxed at a rate of just 15%, your $30,000 would now be worth $81,460 at the end of the same period.
So, in most cases, it is much better to keep money in your Offset Account rather than in a savings account. You are more than twice as much better off by keeping the money in your Offset Account.
There is one important caveat—it is rarely beneficial to pay an additional cost for an Offset Account. Most lenders have “Standard” loans that include an Offset Account but are often around 0.5% or more expensive (plus monthly account keeping fees) than their “Basic” home loans that don’t have an Offset Account.
Lenders like to up-sell people into their Standard Loan knowing that many customers don’t know how to use their Offset Account properly and will end up paying more interest overall.
An Offset Account can be a very effective strategy for staying a step ahead of your home loan, provided that your spending does not outstrip your savings and particularly if you leave your savings to grow over time. The whole concept fails if you never have any money in there.
The key to making an Offset Account work to your advantage is keeping as much money as you can in the account for as long as you can at any given time. Many borrowers do not take full advantage of it because they don’t know how to keep their money in there as long as possible while still living off the income they have pouring into the account.
The trick, as we shall see in an upcoming post, is prudently and systematically using credit cards.