The simple banking act that can shave years off your mortgage

Navigating the world of mortgages can be daunting, with a myriad of products and strategies promising to make homeownership more affordable. Among these, the offset account stands out as a powerful tool – but only if you use it properly, say experts.

Offsets are savings or transaction accounts linked to variable rate mortgages. Funds deposited in these accounts are offset against the outstanding loan balance, reducing interest payments. Essentially, the more money you maintain in your offset account, the less interest you pay.

Furthermore, putting money in your offset also pays down your loan, enabling you to shorten the term of your mortgage.

We are lucky to have offsets; few countries worldwide, including the United States, offer them.

'Offset accounts explained': youtube.com/mortgagechoice

Although there's limited data on how many Australians take advantage of them, Melbourne-based Mortgage Choice broker Paul Williams estimates that approximately 60% of his clients choose a home loan with an offset feature.

But to truly benefit, you must use them strategically. Whether you're a first-time homebuyer, investor, or someone looking to refinance, here are some tips to maximise their advantages.

Tip 1: Get one

University of Adelaide Master of Property Peter Koulizos strongly recommends that individuals only consider home loans with offset accounts. He explains that for minimal fees, these accounts can "shave years and tens of thousands of dollars in interest off your home loan".

"Your savings work double for you in an offset compared to a high-interest account," he says.

"For instance, if you had $20,000 in the bank earning 3% in a high-interest term deposit, you would receive $600 at the end of the year. In contrast, if that $20,000 were in an offset account and your mortgage interest rate was 6%, you would save $1,200. That's twice the savings."

Mortgage Choice broker Paul Williams estimates that 60% of his clients ultimately opt for a loan with an offset account feature. Picture: supplied

Moreover, he points out that earning 3% interest on your savings is taxable, whereas the 'savings' achieved through an offset account are not subject to tax.

Mr Koulizos explains offset accounts are especially important for owner-occupiers because unlike investors, owner-occupiers can't claim expenses, such as interest, on tax.

Tip 2: Deposit as much money as you can

While offset accounts offer significant benefits, you can only reap these gains if you actually deposit money into them, Mr Williams adds.

"Most banks impose a slightly higher interest rate for offset accounts compared to basic home loan packages, along with monthly fees ranging from $10 to $30. So, if you're not actively depositing money and making the offset work for you, it might not be worth it," he says.

"Ideally you'd want to maintain a balance of at least $20,000 or $30,000 to make it worthwhile. Otherwise, you might be better off opting for a basic variable home loan rate, which could be about 0.2% cheaper.

Money 'saved' in an offset account is not subject to tax, making it an attractive way to make your money work harder. Picture: Getty

"Offsets can be fantastic, but only if you utilise them well."

Mr Koulizos suggests having your salary paid directly into your offset account.

"Banks calculate interest daily but charge it monthly. So, on the first day, if you deposit the average Australian wage, your mortgage balance may be $6,500 less than it was the day before. The following day, you might spend $500 on groceries, so your mortgage is $6,000 less than it was two days ago.

"This approach helps minimise the interest you pay and shortens the duration of your loan," he said.

"Your offset account is working for you every single day."

Mr Williams estimates that having a fortnightly wage paid into an offset account can potentially shave five years off the average mortgage term.

"With an average mortgage amount of $600,000, you'd save approximately $120,000 in interest," he said.

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You can also choose how much you put in, depositing more or less according to what funds you have available.

Tip 3: Withdraw as little as possible

An incredible bonus of offset accounts is quick and easy access to your money whenever you need it.

"There are no restrictions on withdrawing the money from offsets because it's yours," says Mr Koulizos.

However, this unrestricted access means you might be tempted to spend the funds, which could ultimately diminish the benefits.

"If you're not disciplined and deplete your account, you'll end up facing the higher interest rate before you know it," Mr Koulizos says.

"But if you are disciplined and keep the maximum amount in the offset account for the longest possible time, it can be highly advantageous."

Those lacking in willpower may do better to swap the offset account for a redraw account, where you have to apply to access your money.

"Some redraw accounts have limits on the amounts you can withdraw, both minimum and maximum, and typically allow only a few redraws per year with a processing time of a few days to reach your account," Mr Koulizos said.

"You'll only make that effort if you truly want or need the funds."

Tip 4: Keep all your transactions in one place

For investors, it's advisable to use the funds in your offset account exclusively for expenses related to your investment property.

"Keeping these funds separate helps your accountant at tax time when calculating your deductions. An offset account hel[ps you keep things neat," says Mr Williams.

Tip 5: Take your time to decide

When many people buy their first home, they often choose a mortgage account with the lowest interest rate and fees they can find.

"But the reality is you can change," says Mr Williams. "Sometimes people get a promotion or come into additional funds, then we can discuss transitioning to products that make their extra money work for them."

For those with a fixed-rate mortgage, linking to an offset account becomes an option once the fixed rate period ends and the loan transitions to a variable rate.

"You can also opt for a split loan – half fixed, half variable with an offset," Mr Williams adds.

Some banks even allow people to have multiple offset accounts, which they can dedicate to specific savings goals like holidays.

"For some people, having two or three offset accounts might help them save more effectively," Mr Williams says.

"As with any offset account, the key is understanding why you want one and how you plan to use it."