You’ve got a mortgage and a spare chunk of change – where should you park it for the best return on your money?
Two common options to consider if you have extra cash:
- An offset account linked to your mortgage
- A savings account.
What’s the difference between an offset account and savings account
Firstly, a savings account is used for one purpose: to tuck away your money and earn interest on the funds.
An offset account is a bit different: you can use it as a savings account of sorts, but it’s linked to a mortgage loan. And because the money in your offset account offsets the outstanding balance on the loan, the savings you’ll make are on the interest you’d otherwise be paying.
That means, if you have a $500,000 loan and $50,000 in your offset account, you’ll only pay interest on $450,000.
A bit more about interest on these types of accounts
If you deposit money into a savings account, you earn interest on the balance – and depending on the account, this might be calculated daily and paid monthly or quarterly.
Some savings accounts pay you more interest if you put a certain amount of money in the account regularly – like once a month.
However, if you have an offset account, it doesn’t earn you interest. The difference is, it reduces the interest that’s payable on the linked mortgage loan. The more money you have in your offset account, the less interest you pay on your mortgage.
Accessing your money
It’s easy to access the funds in your savings account – you can move money to another account, withdraw money from an ATM or head into a branch to arrange a withdrawal or deposit over the counter (if your lender offers those services and isn’t an online only lender).
However, there’s more of an impact if you have an offset account and you decide to withdraw funds from it. You can do this easily, but it’ll reduce your offset balance, which means you’ll have to pay more interest on your mortgage loan.
Weighing up savings and offset accounts
Like any financial options, there can be drawbacks to both savings and offset accounts.
- When interest rates are high, a savings account with a competitive rate will help your savings grow faster – but the downside to these accounts is that rates vary and can be lower compared to mortgage interest rates.
- The downside to offset accounts is there could be annual fees attached and it can be harder to track your spending if you use it to pay for things. See if your lender offers multiple offset accounts, so you can have one for spending and another you put money into, but don’t touch.
How to know which is right for you?
This really comes down to your personal circumstances and financial goals.
If you’re looking to save for something specific, like an overseas holiday, a renovation or a new car, you might find a high-interest savings account more suitable for a more stable return on your money.
If you’re a mortgage-holder and you’re looking to a) pay less interest on your mortgage or b) pay your mortgage off faster, putting a large amount of money in an offset account linked to your home loan may help you do both of those things effectively. The higher the interest rate on your mortgage, the more beneficial your offset account will be, so it can be a strategic way to save significant costs over the life of your loan.
Still not sure what to do with extra cash? It's worth chatting to a financial planner about what’s best for you and your particular circumstances.