Do tax savings, a good return on investment, and a lower mortgage interest rate sound good? If you have a healthy savings account balance and a mortgage on the property, this could be what you get when you link the two.

If you have a chunk of money in your savings account, you probably want to get more bang for your buck than the current low-interest rate. After all, it’s just sitting there, doing next to nothing. On the other side of the ledger, you have a mortgage that you’re paying interest on and you’d like to minimise this. An offset mortgage might be just what you need.

What exactly is an offset mortgage?

An offset mortgage is a type of mortgage lending where the strength of your savings account balance is considered in conjunction with your owed mortgage payment. You get the advantage of paying less on your mortgage interest and potentially paying off your mortgage sooner, while also not incurring tax on the interest that you are receiving on that savings balance.

Given the current scenario where interest rates are dismal, an offset loan is a great way to have your money do more. Linking your savings account to your mortgage debt will mean that when calculating your debt, the credit – the amount available in your savings account – offsets the debt amount. The bank only charges interest on the difference.

With an offset mortgage, your savings account balance reduces the amount of your overall mortgage debt. So, the repayment you make a month on month reduces your loan – both in terms of the amount due and length of the mortgage, and thus the interest due as well.

For example, if you have a $100,000 mortgage and $20,000 in your linked savings account, the 20k is ‘removed’ and your payable amount is considered $80,000. In general, the monthly mortgage payments are calculated against the original figure, in this case, $100,000, so you will be making overpayments on your monthly mortgage, which in the long run means you will pay off your debt faster. And at a lower rate of interest, too.

Is overpaying your mortgage to your advantage?

What does it mean to overpay on your mortgage? It means you are making monthly payments that are more than the requisite amount stipulated in your contract. People do this when they have the spare cash to reduce the length of their repayment, the overall amount they pay in interest, and also to ensure they put any extra money to good use.

Another option you have is to withdraw the extra amount paid if you need too, which means you are basically creating a little nest egg or rainy-day fund through your overpayments. Traditional mortgages allow for up to 10% higher payment but will penalize you if you make payments in excess of that. Added to this, in order to withdraw any overpayment amount, you have to apply for further borrowing. With an offset mortgage, there is no additional steps or questions or penalty for withdrawing whatever excess payment you have made.

Who should choose an offset mortgage?

An offset mortgage is ideal for those who:

  • Are you in a higher tax bracket
  • Have a good sum available in their savings account that they don’t expect to need to access in the immediate future
  • Or, they get lump-sum deposits on a regular basis.

It is popular with non-salaried, self-employed people because it can be used to help cash flow if needed. It is also one way that parents or families can help their children pay for their home without forking over the entire sum.

It is best suited for those who are financially adept and disciplined. Since you have the option to withdraw, penalty-free, any excess amount paid on the monthly mortgage repayment, there is the temptation to do so. However, such an action on a regular basis would cancel out the advantage of taking an offset mortgage, given that offset mortgage rates are a tad more than traditional mortgage rates.

There are advantages and disadvantages to offset mortgages. Pros include being able to pay off your mortgage sooner than the timeframe on the contract and getting returns without having to pay tax on your savings interest. The other side of the coin to remember is that offset mortgages tend to charge a slightly higher rate of interest, and are a long-term solution since the gain from lower monthly payments accrue over time.

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