If you’re looking to become a homeowner during the coronavirus pandemic, you’re not alone. With interest rates at historic lows, it’s never been easier to get into buying a home while still saving money on interest in the process. That being said, there are a wide variety of mortgages to consider if you’re looking to get into property ownership. If you’re really interested in minimizing the number of interest payments you’re making on your mortgage, as well as the amount of interest that you pay in the first place, you may be interested in getting an offset mortgage. Here are a few things to keep in mind about offset mortgages as you consider them for your home purchase.
How does an offset mortgage work?
Put in the simplest terms, an offset mortgage combines a deposit or savings account with a traditional mortgage from the same financial institution. In an offset mortgage, the amount that you’re holding in the deposit account generally offsets the value of the mortgage by a certain percentage, helping you save money on payments. For example, a home loan with a 100% offset setup can help you pay less interest on your loan and even pay it off faster. If you had a home loan of $250,000 and $5,000 in your offset, you only pay interest on $245,000.
As you can see from this example, your 100% offset mortgage is helping you minimize the amount of interest since your rate is calculated based on the smaller amount of the loan rather than the full principal amount. If your interest rate was 3 percent on your home loan, you’d pay a total of $7,500 in interest on a mortgage of $250,000 through a traditional mortgage in your first year alone. Using an offset mortgage, however, your interest payment is calculated off of the $245,000 in the example, meaning that you’d only pay $7,350 in interest in the first year. While these savings might seem a bit small, every dollar saved on interest is a dollar you can put back into your home or another area of your life. Over time and the length of your mortgage, these payments can really add up to create quite a positive offset.
How much can you save with an offset mortgage?
Of course, now you’re probably asking yourself how much you can save over the lifetime of a loan using an offset account instead of just using a traditional 30-year or 15-year fixed-rate mortgage. Since your offset account allows you to pay off your mortgage faster without taking on additional payments, it can be exciting to look into how much faster you’ll pay off your mortgage when you use an offset mortgage. An offset calculator makes this process simple, letting you input factors about your monthly deposits, total mortgage value, and existing savings balance in your offset account. On a $400,000 loan with a starting offset account balance of $10,000 and monthly deposits of $250, for example, you can save over $61,000 in interest and pay off your loan six years faster!
As you can see, if you’re a diligent saver or already have a large savings account that you aren’t planning on touching in case of emergencies, tapping it for an offset account can be a no-brainer. Most people will want to have a large amount of savings on hand when making a home purchase anyway, and using that money in addition to your down payment to help offset the principal your interest is calculated on can be a major boon to saving you money over the course of owning a home. The end result is that you truly own your home sooner, freeing you up to an exciting world of financial possibilities.