A reader has a $500,000 mortgage at 6% and $30,000 in savings earning 4%.
Her money is doing two things at once. Earning 4% on the savings. Losing 6% on the mortgage because the mortgage is larger than her savings. Net result: she’s losing 2% on that money.
Here’s what she doesn’t know. An offset account changes that.
An offset account is a savings account linked to your mortgage. The balance in the offset reduces the interest you pay on the mortgage. If she has $30,000 in offset, she only pays interest on $470,000 of her mortgage, not $500,000.
The saving: $1,800 a year. Compared to her current 4% savings rate: $1,200 a year. Net gain by switching: $600 a year, on the same $30,000, with no extra effort.
Over a 25-year mortgage, maintaining a $30,000 offset balance reduces total interest paid by approximately $28,000. Just by keeping savings in a different type of account.
Offset accounts exist in most countries with large mortgage markets. Australia, UK, Netherlands, some US states. If you have a mortgage and savings, this is the most underused optimisation in personal finance.
Rule
If you have a mortgage, your savings should be in an offset, not a savings account. The mortgage rate is almost always higher than the savings rate. Always.
Action for this week
Call your lender. Ask if your mortgage has an offset option. If yes, open one. If no, ask what it would cost to refinance to a mortgage that includes one.
Next week
Why gift cards are a gift to the company, not to you.
Know someone with savings and a mortgage in separate accounts? Forward this.
P.S. Australian offset accounts are particularly efficient because interest saved is not taxed, while interest earned on savings is. The after-tax gap is usually double what the nominal rate gap suggests.
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Decide Your Money Educational content only. Not financial advice. Decide Your Money is not a licensed financial adviser. Speak with a qualified professional before making financial decisions.