Making the most of your home loan offset account.

If you’ve been reading up on offset accounts, you’ll have heard that they’re great for saving you interest on your home loan and may help you pay it off faster. But, perhaps you’re not sure if this would work for you or how to set up your accounts to work best for you?

The stories below show how different people at different life stages can organise their finances to make the most of their offset account.

First home buyers: Jordi and Lee.

Buying their first home together was a big deal for Jordi and Lee. They had saved hard for their deposit, found an older home in a good suburb that needed a little love, and are now excited about the renos they want to complete over the next few years.

They are passionate about recycling/reusing and so are intending to be on the lookout for pre-used materials or furniture for their home renos and decorating. They’re not in any hurry to complete the renos and want to save the cash for each stage instead of having to borrow more. Their initial thinking had been to get a redraw facility with their home loan so they could keep their extra cash in the loan account and redraw it when needed. This would keep their ‘reno reserve’ separate from their general spending money, reduce their interest costs, but they would still be able to access it easily in the event of an emergency or being able to snap up a bargain for their renos.

Their Home Finance Manager, Mason, also suggested an offset account  as a good place for their regular salary credit and everyday spending. The offset account works the same as a normal transaction account but every dollar in the account is 100% offset against the balance of their home loan meaning that even their spending money is working for them to reduce interest costs. The added advantage of paying less interest in the early days of paying off their loan was a ‘Win, win!’ too, as it meant reducing the amount of interest paid over the life of their loan. Getting started early also means they can potentially shave some time off their loan term too.

They felt like they now have a foot in the door and are keen to make the most of the opportunity to improve their new home, start building equity, and work towards owning their dream home.

Growing family: Jack and Marnie.

Jack and Marnie, like many young couples, found life growing busier and busier as their young family grew. With their eldest child now in middle school and the twins not far behind, there was a never-ending stream of bills to pay for school, sport, and so on. Not to mention that they were also looking to upsize their home to better accommodate their growing family and busy lifestyle.

While they had been trying hard to make extra repayments on their home loan to get ahead, there wasn’t quite enough equity for them to upgrade the house yet, but they wanted to put a plan in place to make this happen within a couple of years. Time to sit down, take a look at their spending, and put together a budget to help them reach this goal.

They also decided to find out more about the offset account they had with their home loan which they hadn’t been using as they still had their own separate bank accounts. Life had all just happened too quickly to get that part of their finances organised.

By going over their bank account statements and with the help of keeping a money diary for a couple of months, Jack and Marnie put together an outline of their spending including their loan repayments and savings targets. It also became clear that they had a better chance of achieving their home ownership goals sooner by combining their money instead of operating independently as they had been.

It seemed to them to make perfect sense for their savings to be in the offset account saving them money on their home loan. They were however a little reluctant to test their spending resolve by having all their money in the  offset account. So, even though it wasn’t the optimal way to use an offset account, and they incurred an extra account keeping fee, they decided to allocate part of their pay to a separate spending account that they used for all their regular bills and purchases. Everything else, including the budget allocation they were saving for things like a family holiday, a new car and the kids’ education fees went into the mortgage offset account.

Within months they could see their savings growing in the offset account and their interest costs reducing. It was a great feeling to see their plans falling into place and to start looking for their next home sooner than they expected.

Empty nesters: Max and Sue.

With the kids now working and fending for themselves, Max and Sue discovered that with no school or uni fees, and only the 2 of them at home to feed and clothe, they were able to save money more quickly than ever before. Maybe that caravan and lap of Australia wasn’t as far off as they had thought! They decided that they were going to work hard to pay off the house as soon as possible, save up for the van and a vehicle upgrade, then set off on an adventure while they were still young enough to enjoy it.

Sue spoke to her local banker, Jasmin, about what they could do to accelerate the repayment of their home loan, without getting all their savings tied up. They wanted to keep some cash available so that they could take advantage of an opportunity if a good-priced van came available for them to buy.

Jasmin’s recommendation was to open an offset account attached to their variable rate home loan and to deposit all their pay into this account, giving them the maximum benefit by having as much money as possible offset against their loan. The offset account had the same accessibility as an everyday transaction account so they could set up direct debits from there for regular bills, they could withdraw cash or make purchases using a debit card and could manage transactions online as normal. While they didn’t earn any interest on their savings, they saved interest at a higher rate on their home loan.

Jasmin also suggested that as an added measure they might like to add a credit card, with an interest free period, to the mix. By making all their purchases and paying all their bills on this one credit card, their money stayed in their account even longer, saving them more interest on their home loan. The key to this being effective though is to clear the credit card in full within the interest free period to avoid paying interest on the credit card. Max and Sue were discipled spenders and had their goal of touring the country to keep them focussed, so they thought this would work well for them.

By taking out a home loan package with an annual fee, Max and Sue were able to get a reduction in their home loan interest rate, some account keeping fees and credit card fees waived, and were on the road to their retirement dream.

A couple of years into their new account arrangements, Max and Sue were loving seeing their offset account balance grow and grow to the point where it was higher than their home loan balance and they were no longer paying any interest on their variable rate home loan. Yes! What a great feeling that is.

Everyone’s financial situation is different however the benefits of an offset account linked to your home loan - flexibility, security, and cost savings - can work in many different situations. While Max and Sue are using the offset to its best advantage, Jordi and Lee and Jack and Marnie will still benefit from having their savings working for them until they’re comfortable keeping their spending money in the offset account too.