Smart homeowners are always finding new ways to be responsible with their money so they can pay down their mortgages faster. Being responsible with your finances begins with having a stable income. However, it’s crucial to find ways to make your money grow so you can invest in your future.
Having an offset mortgage is one way to invest in your future by reducing the amount of money paid on your home loan. An offset mortgage blends a traditional mortgage with a special savings account held with the same financial institution. The money held in that savings account is used to offset your mortgage balance.
If you’re a homeowner and you haven’t considered opening an offset mortgage account, you’re missing out on a great way to save money. With a significant savings account, you could end up paying twice as much on your mortgage in just a few years.
Curious about how it works? Here’s what you need to know about this special kind of account.
1. You can pay down the principal rather than the interest
Paying back a mortgage loan requires paying a significant amount of interest. With an offset mortgage, you can make small payments on the principal instead of just paying down the interest. The more payments you make, the smaller your principal gets, which means your interest payments are also reduced.
For an in-depth understand of how an offset mortgage works, read this detailed guide published by Investopedia.
2. Interest is calculated less the amount in your offset savings account(s)
What makes an offset mortgage so attractive is the fact that the interest is calculated on the remaining balance of the mortgage minus the amount of money in the offset savings account(s). You will always have access to your offset savings account. However, you don’t want to withdraw money from the account. Withdrawing money from your offset savings account will cause your next mortgage payment to be calculated on a higher principal balance.
Use this offset mortgage calculator to see what you’re likely to save using this special program.
3. Family members can link their savings accounts to offset your mortgage
Provided your family members hold a savings account with the same financial institution as your mortgage, they can connect their savings accounts to help offset your mortgage. If your family members are willing to connect their accounts and they don’t touch the money in those accounts, you could reduce your mortgage payments by a significant amount each month.
Having family members connect their accounts is a likely scenario if everyone lives under the same roof. Even family members don’t live under the same roof might be willing to help out if they don’t need immediate access to their savings.
If your family members need to use some of their money in savings, with a high enough balance you’ll still save more money than if their savings account wasn’t connected to offset your mortgage.
4. You don’t have to pay tax on the interest you save
An offset mortgage comes with some great tax breaks. When you have an offset mortgage, you won’t be paying tax on the interest you save. This simple tax break can save you thousands.
A word of caution to U.S. citizens
An offset mortgage is a wonderful option, but tax laws prohibit this practice in the United States. However, CNN Money reported that two U.S.-based companies created a similar program that does comply with IRS regulations.
The program that works in the U.S. is taking out an adjustable-rate mortgage and depositing your paycheck into your mortgage account. Technically, this offsets your principal and lowers the amount of interest you pay. This system mostly benefits people who get large bonuses they don’t need to use for daily survival.
In other words, you’ll only benefit when you don’t need to use the money you put in your mortgage account. This method functions like an offset savings account, but you’re depositing money directly into your mortgage account.
Always check the interest rates first
While the idea of using your savings account balance to offset your mortgage is a wonderful idea, sometimes the interest rates are higher. However, banks are starting to offer better deals, at least to those with large mortgages. Larger loans are more profitable to banks so it makes sense for banks to favor those with large home loans.
Before signing any papers, make sure the interest rate you’re agreeing will make a difference. If you weren’t offered a special interest rate for having a large mortgage, be diligent about the details.