Victorians have plenty of options to pay down their mortgage early to save on interest, and one of them is having an offset account. The funds deposited to this account automatically shrink the loan amount that can be charged with interest, allowing you to reduce your principal more quickly.

Before you shop for house and land packages in Truganina or any nearby community to take out an offset mortgage, it is imperative to understand how it works first. Today, let us debunk the usual misconceptions about it.

An Offset Mortgage Has Lower Interest

The downside of applying for an offset mortgage is higher interest. This type of loan comes with a higher cost of borrowing, for the account is usually associated with bank fees, too.

If you can’t deposit a large sum of money in your offset account, the extra costs that come with it will only make your mortgage much more expensive. Furthermore, it can take time before you can reap its financial rewards.

An Offset Account Reduce Monthly Payments

No, an offset mortgage typically comes with a fixed monthly repayment. You can pay less interest per month, but your bill remains the same.

What makes it unique is that it allows you to increase the amount of principal paid in every repayment. The more funds you have in your offset account, the more principal is slashed off your overall loan balance. Your interest savings are directly used to cut down the principal amount, which is why you can quickly pay off your mortgage fast without increasing what you pay.

An Offset Account Is the Same as a Redraw Facility

An offset account has a redraw feature, except that it lacks the many restrictions attached to a typical redraw facility. You do not have to apply to withdraw money, rendering your funds accessible on demand. You are also not required to pay any fee to take your cash; if there is any charge, expect it to be minimal.

Moreover, an offset account can hold your extra savings, whereas a redraw facility is only available for the cash you wish to pay on top of your regular monthly mortgage repayments.

An offset account requires self-discipline, though. Lax restrictions can make it harder to save, which can work against you if you have poor financial habits.

An Offset Account Can’t Be Linked to a Fixed-rate Loan

Man wearing a suit sitting in a table showing a mortgage loan contract and where the signer must sign

Generally, offset mortgages have a variable rate. However, an offset account can also be used for a fixed-rate loan.

Taking out a flexible fixed-rate mortgage with all the bells and whistles can allow you to enjoy partial interest offset. Some lenders even allow 100% offset. Of course, there will be caveats, so understand how such loans works avoid being blinded by unfavorable features.

A mortgage with an offset account is not for everybody. It can even be disadvantageous if you can’t make a considerable deposit to it. If it does not make sense for you, you can still make your loan less costly by paying extra and avoiding interest-only payments, amongst others.