An Offset account works just like any other transaction account, except for one fundamental difference. The balance of the offset account is reducing the total amount of interest on your mortgage thus reducing the life of your loan. The interest on your loan is calculated on the loan balance minus the balance of the offset account.
For example, if you have a mortgage of $650,000 and you were holding $150,000 in your offset account you would only be paying interest on $500,000. If this was a 30-year loan term and your interest rate was 5% you would reduce your loan term by over 8 years and save $343,376
A common method of maximising the benefit of your offset account is called a “credit sweep”. It’s relatively simple to set up and could save you tens of thousands of dollars over the life of your loan.
Here’s what you need to get started;
- A mortgage with a 100% offset facility.
- Arrange to have your salary paid into this account.
- A credit card with an interest free period longer than your income frequency.
The next step is to use your credit card’s interest free period to pay for all of your living expenses. This keeps the balance of your offset account as high as possible.
Clear the credit card from the offset account each month. An ideal way of making sure this isn’t missed is to set up a direct debit from the offset account to the credit card.
By holding your income in the offset account for as long as possible, you will have reduced the amount of interest you’ll be charged on your home loan, and by clearing the credit card before the interest period starts, you won’t have paid any interest on the card.
It’s having your cake and eating it to.
Tip; Have the limit of your credit equal to, or less than your monthly income minus your mortgage repayment. This will help to ensure you don’t spend more on the credit card than you can repay at the end of month which will help you to avoid incurring any interest on the credit card.
Disclaimer: This is general information and should not be taken as personal advice. Please contact your Medico Finance Australia finance specialist on 1300 115 740 or info@medicofa.com.au if you would like to discuss your specific situation.