Mortgage offset accounts are not very commonly offered by American banks as yet, but banks across Europe and Australia have been offering these amazingly flexible loan types for several years. With enough demand, it’s possible American banks could begin offering these in order to help their customers to repay debt more quickly.

When used correctly, it’s possible to repay an average mortgage very quickly. However, if used incorrectly it’s equally possible to cost yourself a lot of money and time. You should always take time to completely understand how a mortgage offset account works and how it can benefit you before you apply for one.

An offset account is nothing more than a savings account that is linked to your mortgage account. You are encouraged to leave your savings in your account for as long as possible. At the end of each month, the bank calculates the interest due on your mortgage balance and then deducts from your balance the amount you’ve left in your savings account.

Effectively this can mean quite large savings on your interest bill each month.

How Does a Mortgage Offset Account Work?

The mortgage portion of your mortgage offset account is nothing more complicated than a regular principal and interest loan. Every repayment you make is made up of an interest portion and a principal portion. You still make your repayments the same way as your normal mortgage.

The primary difference is that you have a linked savings account offsetting against your mortgage balance.

If you have a mortgage balance of $150,000 and you have $5,000 in your offset savings account, then you will be charged interest on $145,000. This means the more money you save, the less your interest bill will be at the end of each month.

When you look at the percentage of your monthly mortgage repayment that repays your balance and the percentage that pays the bank’s interest, you’ll quickly realize that only a small amount of your money is actually repaying your loan.

Reducing the amount of interest you’re charged each month means that a higher percentage of your monthly mortgage repayment is then going towards the principal or balance of your loan, which pays it off faster.

Can I Repay My Mortgage Even Faster?

If you know you’re able to be disciplined with your money, then there is a way to use a mortgage offset account to really speed up your mortgage reduction plan. Please be aware that this method does require discipline, budgeting and awareness of what you’re spending at all times, otherwise it won’t work!

The bank that holds your mortgage offset account should also offer a credit card that has an interest-free period. For the purpose of this example, we’ll assume you have a 30 day interest free period.

You then ask your pay-master to put all your salary into your savings offset account every month and leave it there untouched for the entire month. This means you have as much money as possible offsetting against your mortgage for the longest possible time, so it’s reducing your interest bill.

During that month you use your 30 day interest period on your credit card to pay all your bills and expenses. Don’t use the cash-advance option on your credit card or you’ll end up being charged interest on the full amount owing immediately.

At the end of the month before you can get charged any interest, you repay your credit card balance from the amount still sitting in your offset account. Your mortgage interest is charged at a lower rate and your mortgage repayment is made. Instead of only a small percentage of your payment repaying your principal, a larger portion is now chipping away at your loan balance for you.

What Could Go Wrong With a Mortgage Offset Account?

While the structure of these loans seems very simple, running them properly can be a quite advanced banking strategy. The biggest problem customers have is not being able to control the amount they spend on their credit card each month.

If you’re the type of person who is likely to spend more money on credit than you earn, then you’ll find that you’re paying high interest on your credit card, not have enough savings in your offset account to cover the payment and then you’re having no effect on your mortgage at all.

In some cases, it’s possible to max out your credit card, empty your offset account and miss your mortgage payment completely! This is why it’s vitally important that you remain very disciplined with your finances when you decide to use a mortgage offset account.

One of the reasons for the old saying “the rich get richer and the poor get poorer” is simply that the rich know how to use more advanced banking products to their advantage. This saves them money, repays their debts quickly and lowers their total interest costs every month.

Where Do You Find a Mortgage Offset Account?

While there are not many American banks offering these more advanced financial products yet, there are several large European and Australian banks starting to introduce them for customers in the US.

Ask a qualified mortgage professional to find out more information about a mortgage offset account for you if you’re curious to learn more.