Offset accounts can help pay off your mortgage sooner

An offset account allows a home owner or investment property owner to place an amount of money on deposit with their lender. Instead of receiving interest on the deposit as would be usual, the interest is ‘offset’ against the interest accruing on the mortgage.

Let’s take a simple example. You become a beneficiary of a will and gain $100,000 as a cash amount. You decide that you do not want to pay that money into your loan account as a capital reduction because you have it earmarked for another purpose later on. You may simply want to keep it as a future reserve.

If you establish an offset account with your mortgage lender, and place that $100,000 on deposit, the lender will waive the interest due on the first $100,000 of your mortgage loan. This means that a much higher proportion of your normal monthly repayments will go to the repayment of principal rather than interest. Consequently, your mortgage is reduces faster because you pay more off the principal. Various conditions and terms apply which we can explain.

There are a number of other benefits to using this financial tool. There are also conditions. For example it must be your own money in the offset account.

At the start of a loan contract, buyers are usually looking for every dollar they can find to establish their own equity, limit their total borrowing and ensure they have sufficient cash flow to meet repayments. The benefits of offset do not usually come into play at this stage because an offset account requires that you have excess liquidity.

The concept of offset usually becomes relevant at a later stage when the loan has been running for a while and when the borrower’s financial circumstances improve.