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Q&A - Offset accounts

I know that with a mortgage if you make your repayments fortnightly instead of monthly you will pay your loan off sooner and hence save on interest. I understand the principle behind this since there are 26 fortnights a year you make one additional repayment over the year. My question is if you have a 100 per cent offset account and you got say $10,000 in that, does still make a difference if you pay your loan fortnightly or monthly?

Further, if you have a 100 per cent offset account with say $30,000 in there does it make a difference if you make that a one off extra repayment or keep it in your offset account? Will I save interest with the former? Thank you. 

Fortnightly repayments help reduce the term of the loan because the bank will calculate the interest daily. If you continue to pay more money into the loan through the month, this helps reduce loan balance and hence the interest that is calculated. The other part of this is that the bank usually only debits the interest to the account at the end of the month, so if you are paying down funds within the month you are reducing the balance on your loan and saving yourself interest.

The use of an offset account is quite a different strategy. Banks generally offer two types of offset accounts. One is a 100 per cent offset and the other is not a 100 per cent offset. You always want to make sure you are with a bank that provides a 100 per cent offset account. The 100 per cent offset account is the best as it means you fully reduce the interest on your loan while the partial offset account means that you are not fully reducing the interest on your loan. If you only have a partial offset account, to get the full benefit you would need to consider paying your savings directly to the loan rather than keeping a large amount of your cash savings in the offset account.

Therefore, as long as you have a 100 per cent offset account, you do not need to put the funds into your loan. By having a 100 per cent offset account, you achieved the same results as paying the funds off the loan. The main difference being that if you do need to access the cash in the future you do not have to redraw the funds from your loan and pay any redraw fees. Other than that, there is no difference.

Offset accounts are a great way to save money and still reduce the interest costs of your mortgage.

Using an offset account is a different strategy to making your payments fortnightly. I would recommend you use both strategies to really attack your loan. By paying fortnightly, you are reducing your interest and then if you can save extra money and put this into the offset account, this also saves you interest. Note if you are the type of person who will spend cash if you can see it, then it may also be a good strategy to move some of the savings from the offset account to the loan account so that you cannot readily access the funds.

For advice you can trust, book a complimentary first appointment with Switzer Financial Services today.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Monday, August 31, 2009

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