Example of offset account in mortgage and its benefit
Here is a simple example of how an offset account in a mortgage works and its potential benefit!
Example
- You have a home loan with a remaining balance of $200,000.
- Your monthly mortgage payment is $1,000.
- You also have an offset account linked to your mortgage.
Benefit of Offset Account
In this scenario, you've deposited $20,000 into your offset account, which is linked to your mortgage. Here's how it works:
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Offset Account Balance: Your offset account balance is $20,000.
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Interest Calculation: The money in your offset account is subtracted from the outstanding balance of your mortgage before interest is calculated. So, instead of paying interest on the full $200,000 mortgage balance, you're only paying interest on $180,000 ($200,000 - $20,000).
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Monthly Mortgage Payment: You continue making your regular monthly mortgage payment of $1,000.
Benefit
The primary benefit of the offset account is that it reduces the amount on which interest is calculated, potentially leading to significant interest savings. Here's how it can benefit you:
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Interest Savings: By maintaining a balance of $20,000 in your offset account, you pay less interest over the life of your mortgage. Your monthly payments remain the same, but a larger portion of each payment goes toward reducing the principal balance of your loan.
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Faster Loan Payoff: Because more of your monthly payment goes toward reducing the principal, you can pay off your mortgage faster than if you didn't have the offset account. This can potentially shave years off your mortgage term.
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Flexibility: The offset account provides you with easy access to your savings. If you have a financial need or want to make a significant purchase, you can withdraw the funds from the offset account without restrictions or penalties.
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Tax Benefits (in some countries): Depending on your country's tax laws, the interest savings from the offset account may not be subject to income tax, providing additional financial benefits.
So in short, an offset account can help you reduce the interest you pay on your mortgage, save money, and enjoy greater financial flexibility. However, it's essential to check with your lender to understand the terms and conditions of your specific offset account and how it aligns with your financial goals.